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2021 Church and Nonprofit Tax & Financial Guide

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2021 Church and Nonprofit Tax & Financial Guide 2021 CHURCH AND NONPROFIT TAX & FINANCIAL GUIDE Appreciation This guide is a successor edition of a guide originally authored by Dan Busby. The availability of this guide today would not be possible were it not for Dan’s original authorship of it and his improvements to it over the years. ECFA is most grateful for Dan’s vision in creating this resource and for his contribution of its content to ECFA for publication of subsequent editions. 2021 Church and Nonprofit Tax and Financial Guide Copyright © 2020 by ECFA (Evangelical Council for Financial Accountability) Requests for information should be addressed to: ECFA, 440 West Jubal Early Drive, Suite 100, Winchester, VA 22601 ISBN 978-1-949365-28-3 Publisher’s note: This guide is published in recognition of the need for clarification of tax and other laws for churches and nonprofit organizations. Every effort has been made to publish a timely, accurate, and authoritative guide. The publisher, author, and reviewers do not assume any legal responsibility for the accuracy of the text or any other contents. Readers are cautioned that this book is sold with the understanding that the publisher is not rendering legal, accounting, or other professional service. Organizations with specific tax problems should seek the professional advice of a tax accountant or lawyer. References to IRS forms and tax rates are derived from preliminary proofs of 2020 forms or 2019 forms. Some adaptation for changes may be necessary. These materials should be used solely as a guide in filling out 2020 tax and information returns. To obtain the final forms, schedules, and tables for filing returns and forms, contact the IRS or a public library. The Internal Revenue Code does not use the word “nonprofit.” The Code refers to nonprofits as “exempt organizations.” Certain state statutes use the term “not-for-profit.” A not-for-profit organization under state law may or may not be tax-exempt under federal law. In this book, the term “nonprofit” refers to nonprofit organizations that are exempt from federal income tax. Any internet addresses (websites, blogs, etc.) and telephone numbers in this book are offered as a resource. They are not intended in any way to be or imply an endorsement by ECFA, nor does ECFA vouch for the content of these sites and numbers for the life of this book. With the exception of the sample board resolutions, checklists, charts, and procedures, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means— electronic, mechanical, photocopy, recording, or any other—except for brief quotations in printed reviews, without the prior permission of the publisher. Printed in the United States of America ii Contents Introduction . v Recent Developments . 1 1 Financial Integrity Foundations . 7 • Independent board . 9 • Managing conflicts of interest . 10 • Compensation review and approval . 13 • Proper stewardship practices . 14 2 Tax Exemption . 19 • Advantages and limitations of tax exemption . 20 • Tax exemption for churches . 22 • Starting a church or other nonprofit organization . 23 • Unrelated business income . 27 • Private benefit and private inurement . 34 • Filing federal returns . 38 • Postal regulations . 42 • State taxes and fees . 42 • Political activity . 44 3 Compensating Employees . 47 • Reasonable compensation . 48 • Housing and the housing exclusion . 49 • Deferred compensation . 53 • Maximizing fringe benefits . 56 • Workers’ compensation . 64 • Overtime and minimum pay . 65 • Internships . 66 • Paying employee expenses . 66 • Reimbursing medical expenses . 68 • Nondiscrimination rules . 69 4 Employer Reporting . 71 • Classification of workers . 71 • Reporting compensation . 76 • Payroll tax withholding . 76 • Depositing withheld payroll taxes . 81 • Filing quarterly payroll tax forms . 81 • Filing annual payroll tax forms . 84 2021 CHURCH AND NONPROFIT TAX & FINANCIAL GUIDE 5 Information Reporting . 95 • General filing requirements . 95 • Reporting on the receipt of funds . 97 • Reporting on the payment of funds . 98 • Summary of payment reporting requirements . 109 6 Financial Management and Reporting . 111 • Accounting records . 112 • Financial reports . 114 • Budgeting . 116 • Cash reserves . 120 • Audits and other related services . 129 • International financial activity . 132 • Fraud . 137 7 Charitable Gifts . 141 • Charitable gift options . 143 • Percentage limitations . 146 • Gifts that may not qualify as contributions . 147 • Charitable gift timing . 150 • Acknowledging and reporting charitable gifts . 151 • Quid pro quo disclosure requirements . 165 8 Special Charitable Gift Issues . 175 • Gifts with giver restrictions . 175 • Contributions to support missionaries and other workers . 178 • Contributions to support short-term mission trips . 182 • Other special charitable contribution issues . 194 Projected 2021 Employer Tax Filing Dates . ..
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