Before Anyone Writes Their Next Check, Read This
By Raul Rivera
“Why do they do it that way?” I asked the customer who called our office. He responded, “If the money goes through the church, we will have to report it.” “What do you mean?” I probed further. His answer, “The pastor will have to report it on his taxes,” revealed the real issue at hand. “I see!” I responded, “In order for the pastor not to have to report it on his taxes, the church will have to break the law.” Somewhat surprised by my answer, the customer replied, “That’s what our accountant told us to do. He said that’s the best way to take up the ‘love token’ for our pastor.”
Advice from the CPA
This is a conversation I had with a deacon of a church. The church wanted to bless their pastor during clergy appreciation month and decided that in the third Sunday of October a “love token” offering would be collected on his behalf. The counsel they got from their CPA was that if the members either gave in cash or the members of the church made their checks payable directly to the pastor, it would not be taxable and the church would not have to report it to the IRS. The CPA told them that section 102(a) states that “the value of property acquired by gift . . .” did not constitute gross income. He specifically told the church deacon that in order for the pastor to receive the love token as a tax-free gift, no one was to write a check to the church.
Dealing with love offerings and keeping records
With all of the information that exists today, there are still many churches that are improperly handling love gifts given to the pastor. Many churches have to deal with love offerings that come in from time to time. How they deal with them can make a big difference. In the case of the deacon, the advice they received was erroneous on several points. The CPA was unaware that section 102 was amended in 1986 to include paragraph (c). It states that "any amount transferred by or for an employer to, or for the benefit of, an employee" could not be counted as a gift under section 102(a). Section 102(c) codified a position the IRS has held for many years. The 1990 EO CPE text published by the IRS states that the general rule of inclusion as found in section 102(c) “applies not only to payments of money, but also to other transfers by or for an employer to or for an employee's benefit.”
The law on such matters
So here is what the laws says when a church takes up a love offering for the pastor but the members make the checks payable to the pastor instead. Section 61 defines gross income as “all income from whatever source derived.” Additionally, when gifts are given to the pastor directly, like the members did with the church mentioned above, they are doing it for the employer because the church sanctioned it. Thus, the members’ actions of giving directly to the pastor provides no legal tax benefit to the pastor and they do not get any tax deductions for their giving. It gets worse. If the church does not properly report the love offering on forms W-2 and W-3, the church would be in violation of section 6721 for failure to file a correct informational return, and of section 6722 for failure to furnish correct payee statements. The CPA could be held to be in violation of section 6701 for aiding and abetting understatement of tax liability.
The seven quick steps to doing it right
I often get asked what the proper way is to take up a love offering for the pastor? Below are 7 steps that will help clarify the best way to do it.
1. Make sure everyone makes his/her check payable to the church
2. Make sure they write “pastoral salaries” on the memo
3. The church collects the offering and counts it
4. The church makes sure it has properly set up a housing allowance designation for the pastor
5. The church pays it to the pastor as salary to the pastor
6. The church issues tax deduction receipts to the givers. Since the gift was given to the church to help the church further its purposes, the love offering is tax deductible.
7. The church includes the love offering in its end-of-year reporting on form W-2 and counts as much of the love offering that qualifies as housing allowance. Many ministers are able to receive the love offerings tax-free because 100% of the offering can be written off (excluded) as housing allowance.
The dreaded IRS audit
The tax laws of the land favor ministers more than any other type of person. Why walk in grey areas when the black and white is so favorable? I know of many ministers today that walk in dread of an IRS audit because they have taken such aggressive positions with their love offerings. The one thing I most commonly hear from them is that they know that if they got audited, they would be in trouble. The good news is that they do not have to stay there. Why not start now and plan for better compliance with church laws and your personal taxes? You will be surprised to learn that with some proper panning you could reduce your tax burden by thousands of dollars while at the same time fixing issues from the past.