Following a three-year investigation of six churches (televangelists organized as churches), Senator Charles Grassley (R-Iowa) closed the investigation and handed off 61 pages of primarily church-related tax policy issues to the Evangelical Council for Financial Accountability (ECFA) on January 6, 2011. The ECFA has, in turn, created the Commission on Accountability and Policy for Religious Organizations, with CPA Michael Batts as chair.
Among several issues from the investigation that will be reviewed by the commission are: housing allowance exclusions for clergy; whether churches should be required to file detailed financial reports; and the status of "love offerings" to ministers.
As this work proceeds, what lessons of the Grassley investigation can be applied to churches? Here are a few:
This is a wake-up call for churches that are not careful in distinguishing between expenses that are church-related and those that are not. Where does this danger make its appearance in the life of the church? Usually in paying staff-related expenses.
Occasionally staff may submit expenses for reimbursement that are not church-related. Examples: A pastor takes his family out for a meal. This is not a church-related expense. Or, a pastor joins a gym or a softball team, because he is trying to stay in shape. Again, these are not church-related expenses.
In the Church of the Nazarene, the ministerial threshold for tax purposes is very simple to determine. Only ministers who are ordained or district licensed qualify for this special treatment. For example, providing a housing allowance for a pastor with only a local license would be inappropriate.
A few weeks ago, I was attending a church where the senior pastor had just departed and a new business administrator had joined the staff. The administrator was working on the Form 1099-MISCs for perhaps a dozen paid nursery workers (we will not go into the Form W-2 vs. 1099 issue for these workers). When he asked the nursery workers for their Social Security numbers, they said the former pastor had given them ministerial licenses and told them they had a housing allowance and therefore should not get a Form 1099-MISC. This bizarre situation is an example of something that gives churches a bad name and sends the message that churches can get away with anything!
The Grassley report also highlights a recent tax court case involving the well-known trumpet player Phil Driscoll. He was afforded ministerial status by his nonprofit ministry, entitling him to a housing allowance. Driscoll had a house in Cleveland, Tennessee, as well as a lake home in the area. He excluded housing expenses for both homes under the ministerial housing allowance provisions.
The IRS challenged the exclusion of housing expenses for multiple homes and the case went to the tax court. In a 7-6 decision in December 2010, the court ruled in favor of Driscoll. This decision has set off a firestorm of criticism of the housing allowance (this is all in addition to the case working its way through the courts as to the constitutionality of the housing allowance). So while Driscoll won his case, the question persists as to whether his victory was good for ministers, in general.
Love offerings are generally reportable on Form W-2 as compensation. If the amounts are reported on Form W-2, they are generally considered to be subject to SECA-type Social Security tax (if paid to lay staff, subject to FICA-type Social Security tax).
ECFA's new Commission on Accountability and Policy for Religious Organizations will review the above issues and much more over the next two-to-three years. Stay tuned, because some of the issues could potentially affect every congregation in America.
Dan Busby is a certified public accountant, president of the Evangelical Council for Financial Accountability (ECFA), and the author of the Zondervan Clergy Tax & Financial Guide.