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What you don’t know actually can hurt you
By Raul Rivera
The landscape for churches and ministries is filled with pitfalls.
Over the last 20 years, Congress and the IRS have become very interested in the activities of churches, ministries and nonprofits, which has led to the enactment of section 4958 and the creation of the Exempt Organizations Executive Compensation Compliance Project, resulting in increased enforcement presence and millions of dollars in fines.
Those who don’t perceive how the landscape has been changing might find themselves inundated with tax trouble. Moreover, they also miss out on the hundreds of truly great benefits and exemptions available.
With that said, let us take a look at the path churches and ministries are facing today. As you read, I’m going to discuss just a few areas that might bring challenges to your ministry. While I’m always convinced that the Lord will lead His church in victory, one of the ways He does it is by sounding the alarm so that His church is not caught off guard.
5 challenges to be aware of
#1: Watch your activities
The activities of churches and ministries on a day-to-day basis need to be balanced with the income tax regulation in 1.501. In essence, the regulation states that if an organization substantially participates in an activity that isn’t tax-exempt, the organization loses its tax-exempt status.
Furthermore, the US Supreme Court ruled, “A single nonexempt purpose, if substantial in nature, would preclude an organization from qualifying under section 501(c)(3) of the Code.” This brings to question some of the activities that churches engage in, that if audited could preclude them from tax-exempt status. Such activities include (but are not limited to):
- Renting out facilities to the local public
- Having too many bake sales
- Running a café or bookstore during non-church or non-ministry events
It’s not that a church cannot engage in any of these activities, but rather that these activities – if NOT done correctly — can be classified as activities unrelated to the church’s charitable purpose and possibly get ruled by the IRS to be substantial. If this happens, your ministry might lose its tax-exempt status.
#2: The IRS is allowed to give you bad advice — and not be responsible.
In a 2011 ruling (David Michael Maser v. Commissioner), the court ruled that if an IRS employee gives you bad advice, it’s not binding on the IRS. Can you imagine what that might mean to your church? Many IRS employees aren’t sufficiently trained to answer questions dealing with even simple matters, let alone the complexities of church and ministry.
So, if you have a question, do not call the IRS. Seek sound advise from an attorney or CPA.
#3: Cribs in the church nursery.
Getting informed on this one is very crucial. If you ever need a baby crib for the church nursery, getting a parent to donate his / her child’s outgrown crib is no longer going to work. You’ll have to throw out all such donated cribs and replace them with cribs that are compliant with Code 1219.2. When purchasing a new crib, make sure it complies with the requirements. Here is a reference to the rules. If your insurance company hasn’t required it by now, they probably will soon.
So, what does a church do with non-compliant cribs? It might sound completely contrary to your mission of helping the poor, but liability might occur if you give the cribs away to a needy family. Keep in mind that by donating such a crib, you take on a huge risk of liability if the child gets hurt in the crib or worse yet, suffers a fatal accident. Guess who’ll knock at your door?
#4: Supreme Court case potentially changes the definition of a minister.
This is actually a good thing. On January 11, 2012, for the first time ever, the Supreme Court issued a ruling that affects the definition of a “minister” and gives guidance on what steps a church can take to ordain its own ministers.
A church assigning the title of minister isn’t enough. In this case, the court looked at facts and circumstances and held that the individual in question was ordained by a church, even though most of her duties were clerical and education, and not sacerdotal.
The details are too many to list here. We teach this at all of our conferences. If you’ve never attended one, I guarantee you’ll receive very empowering information that’s timely for the Church today.
#5: Changes to tax withholdings and deposits
If your church has employees, all taxes that you withhold must now be paid to the IRS electronically, using the Electronic Federal Tax Payment System (EFTPS.gov). When you pay your taxes electronically you’ll be given a number that can be used as a receipt or to trace the payment. Make sure you don’t lose it.
The vast majority of churches must pay their payroll taxes on a monthly basis, generally by the 15th day of each month. The dates to pay the payroll taxes are very strict and can easily lead to penalties, as shown below.
- 2% — Deposits made 1 to 5 days late.
- 5% — Deposits made 6 to 15 days late.
- 10% — Deposits made 16 or more days late.
- 15% — More than 10 days after the first IRS bill
Sound the alarm!
So, what do you do with information like this?
What I’ve discovered is — though I’m announcing it at a level-10 volume — many leaders hear it at only a level-1 volume. Unfortunately, many churches have significant compliance issues. With increased church scrutiny and IRS enforcement presence, the years ahead might become more challenging for churches to StartRIGHT® and StayRIGHT™.
Church Planter. Speaker. Author. CEO. Raul Rivera has had ample experience in the church planting world. His current venture, StartCHURCH, has helped thousands of churches to start right. Rivera has compiled an array of manuals and software tools that help churches stay compliant with the IRS. He also hosts more than 35 national conferences per year, training pastors on how to launch their churches. Raul is married to his wife, Genel. They and their five children live in Atlanta.