Thursday, September 20, 2018

Special Offering for a Woman with Cancer

Question: Hey Fletch...Our church wants to take up a special offering for a woman who has cancer. Can we ask people to give money through the church for her?

Answer: With the spirit of Christ’s love, we all care deeply for folks in a crisis. That crisis could be medical, a crisis event, housing related, or a natural disaster.

Let’s clarify the issue. Since the money is going through the church, the supposition is that the donations would be tax-deductible. If people want to give funds that are not tax-deductible, then anyone can give in any way that they like. However, most folks in church reasonably assume that any money given to the church will be tax-deductible. This is why Richard Hammar recommends that, “Since such contributions are not tax-deductible by the donor, the church should not receive them.” Notice that he said “should” and did not say “cannot.” If you receive gifts earmarked for an individual, they are not tax-deductible to the donor.

Now to the issue of tax-deductible contributions. The IRS is quite clear on tax-deductible contributions. IRS Publication 625 states:

You can’t deduct contributions to specific individuals, including the following:

Contributions to individuals who are needy or worthy. You can’t deduct these contributions even if you make them to a qualified organization for the benefit of a specific person. But you can deduct a contribution to a qualified organization that helps needy or worthy individuals if you don’t indicate that your contribution is for a specific person.

Example. You can deduct contributions to a qualified organization for flood relief, hurricane relief, or other disaster relief. However, you cannot deduct contributions earmarked for relief of a particular individual or family.

 There are two principles that the IRS articulated in a private letter ruling:

  • The organization must have full control of all donations.
  • No donation can be earmarked for an individual.

If your church is taking up an offering for “Mrs. Smith and her illness,” then this offering will not qualify for tax-deductible donations.

Your church can take a special offering for benevolence ministries and these donations can be tax-deductible. Donation envelopes, e-giving, notes accompanying the donation and checks cannot contain the name of the individual. The church has full control of the donations and can give assistance to individuals as the benevolence policy allows.

-DRF

Thursday, September 13, 2018

What are Designated Funds?

Question: Hey Fletch...Can you educate me about “preferred ministry” rather than “designated” funds which are restricted? We are a church of 165 and struggling to make budget. As a member of the finance team, I can see that people are giving to certain ministries or projects at an average of about $500 per week. However, for most weeks, our general fund is below budget by more than $500. Should we stop designated giving? Should we ask for continued giving on that level and say it would be used for “preferred” ministries?  How can that be explained to the congregation?

Answer: Whether a church has a couple of hundred people or a few thousand, the issue that you presented is the same. Some in the congregation prefer to give to designated funds over the general fund. A designated fund is a donor restricted fund. By law you can only use the funds for the designation that the donor has placed on the funds. You cannot use designated funds for expenses in other areas. If someone gives money to “missions,” and your church accepts the check, then you can only use the money for missions. There are essentially no exceptions to this rule.

A problem with designated funds is that they allow people to give to preferred areas without “paying the freight” of the electricity bill, the staff costs, or other expenses of running a church. Many churches do this with a designated missions fund or benevolence fund, but people often understand that these are over and above their regular giving to support the church.

A simple question highlights the issue, “What if everyone gave to a designated fund?” This leads to a follow-up question, “Will anyone pay for the staff to administer those areas, process checks, or keep the lights on?”

A way to resolve the issue is to do stop receiving designated funds. Many churches have a “one-fund” approach to ministry. Give to the general fund and the church budget will allocate all expenses.

-DRF

Wednesday, September 12, 2018

Can an Auto Allowance Be Tax-Free?

Question: Hey Fletch...I believe I’m clear on the minister’s housing allowance designation. What about a car allowance? We have a new employee who says ministers can claim a car allowance that’s much like a housing allowance. I’ve not heard of that. Is it something we can leverage for our ministerial employees? Thanks!

Answer: A car allowance is essentially a taxable bonus. No documentation is needed because it is a bonus. There is nothing in a car allowance that is comparable with the housing allowance … it doesn’t reduce taxes but increases them.

There is a way for auto use to be tax-free. The IRS each year publishes standard mileage rates for “costs of operating an automobile for business.” If you want tax-free reimbursement for auto uses, each trip has to be documented for the purpose, miles, date, etc. This is called an “accountable plan” and the individual must record a log of every trip. The rate for business mileage for 2018 is 54.5 cents per mile. IRS Publication 463 outlines the policy and what is required in a log.

For example, with a log, a pastor can drive 51 miles round trip to visit someone in the hospital. The church can reimburse the pastor $27.79 for the trip. Generally, logs are kept for an entire month and a reimbursement check is then drafted for all logged miles. Some churches do not allow staff members to drive their own vehicles on long trips, say 1,500 miles round trip, which would an $817.50 reimbursement! For long trips, the church can have a policy in place that requires rental cars to be used.

Making a log of each trip can be a pain. Often pastors forget to log their miles. At a recent workshop, a pastor mentioned that he used a smart phone app for the purpose. Without a log, you can’t reimburse tax-free.

If you give an automobile allowance, it is taxable.

-DRF

Saturday, September 8, 2018

Who is Exempt on the Church Staff?

Question: Hey Fletch...I am confused about exempt and nonexempt employees. My understanding is that an employee paid an hourly rate is not exempt. Are there exceptions? I’m under the impression our employee “Ann” would be eligible for overtime for any hours worked over 40 in a one-week time period. But my manager is telling me that’s not true.

My manager replied that it depends not only on hours, but also on the “class” of the employee, whether they are exempt or non-exempt.  An HR director from a sizable company walked through it all with us. They said that we can have hourly employees that are exempt and non-exempt. It depends on the nature of their duties and whether or not they have “supervisory” responsibilities and independent decision making which Ann does. I believe Ann averages 39 hours.

Thank you for helping me understand this!

Answer: First let me say that pastors are exempt from the Fair Labor Standards Act. The Department of Labor writes about the FLSA that it “establishes minimum wage, overtime pay, recordkeeping, and child labor standards.” Workers who are exempt from the FLSA can work more than 40 hours in a week without extra compensation, are not required to keep a timecard and do not need to take meal and rest breaks, among other regulations.

Pastors are exempt because, like some other workers, they are considered “professional.” Other kinds of exempt employees are executives, managers and certain administrative personnel. Each of these three classes of exemption have job requirements associated with it. You can read about those here.

In addition to the job requirements for FLSA exemption, the employee must exceed the federal salary minimum of $23,660 a year. Certain states have a higher salary minimum for exemption. For example, California requires that exempt employees receive at least two times minimum wage. In 2018, that comes to $45,760. Exempt employees must be paid a salary … you cannot pay them for the number of hours worked.

For executives, managers and some administrative personnel to be exempt, the job requirements and the salary minimums must both be met. Otherwise, you must pay the staff person overtime if they work more than 40 hours in a week. California, and perhaps your state, has extra provisions, such as overtime is required if the employee works more than 8 hours a day, or more than 40 hours a week or seven days in a row.

Whether a church classifies an employee as “hourly” or “salary” has no bearing on their exemption status. Suppose that a church pays a non-exempt employee a salary and that employee works overtime. The church must compute the employee’s hourly wage (which is their annual salary divided by 2080 working hours in a year) and then pay at least time and a half for every hour worked overtime.

Get this right for your church … otherwise you will be in a heap of trouble.

-DRF

Saturday, September 1, 2018

Financial Health in a Church of 100

Question: Hey Fletch...I am involved with trying to get our church’s financial situation back on track and healthy again. Would any of your reports contain information on a church that has about 100 members? Also, would there be a report that suggests how many paid employees there are typically with a church that size? We have four, which is killing us, but little desire to cut any positions. Also, we live in an expensive metro area, so which report would you suggest would be best for us?

Answer: Churches of all sizes struggle with the issue that you have raised. I wish that I could say, “Aha, that is a problem unique to churches of 100 members.” If I could boil your issue down to one phrase it would be, “We all want more than we can afford.” There is the principle, now let’s look at the specifics.

You identified the problem in your email. Your church has four staff people and you said, “which is killing us.” Let’s talk about staff and benefits as a percentage of budget. National averages indicate that most churches have between 40-60% of their budget going to staff and benefits. Churches at 40% are generally those which are paying a mortgage. After the bank loan is paid, churches often redirect those funds to staff, and the ratio rises to 60%. If you are at 60% or more, then you should raise a red flag.

National averages are just that—national and average! You live in an expensive part of the country. Your local church and staff will have unique factors, such as age of your facility, status of needed capital repairs, maintenance issues, medical insurance, state income taxes and housing costs. Living an in expensive metro area often requires higher salaries so that staff can afford housing. Medical insurance has risen considerably in the last decade, further impacting budgets. You need to weigh the national averages with the unique factors of your local church.

How do you know if your church budget is unhealthy? You should raise a yellow or red flag if you have insufficient funds for:

  • Maintaining your property. Curb appeal is important to visitors, as are clean bathrooms. For example, some defer maintenance on the parking lot which is “penny wise and pound foolish.” 
  • Allocating sufficient funds for ministry. You have staff but they don’t have enough money to fully empower their work.
  • Supporting outreach into the community and world. A generous church, like the Macedonians in 2 Corinthians 8:1-2, has funds to give to others: “Now we make known to you, brothers and sisters, the grace of God given to the churches of Macedonia, that during a severe ordeal of suffering, their abundant joy and their extreme poverty have overflowed in the wealth of their generosity.” Net Bible® 
  • Saving for a new roof, sound board or microphones. Does your budget have sufficient contingency funds or a savings plan for capital expenses?
  • Investing in retirement for staff. I hear so many stories about pastors who can’t afford to retire because they and their churches didn’t plan for the future.

When staff costs are too high, these items are the first things that are cut from a budget. Your church budget, along with the income and expense report, will give you the hard data that you need to analyze these issues.

-DRF

Monday, August 20, 2018

What Should I Look for in Online Giving?

Question: Hey Fletch...Our church is considering starting online giving. What are the kinds of things that we should be looking for?

Answer: From a user’s perspective, the number one thing for me in an online giving platform is ease of use. If I’m a new online donor, I want a system that works easily for me. Along with that is security. I want to know that the donation processing is secure and that my donation data is secure. Brad Leeper, President of Generis, and I were talking about online giving recently. Let me ask him to share his thoughts.

Brad—

Your question highlights four important values an XP should consider and execute for their church. 

First—Digital giving is an option that many people prefer. As wise leaders, we should make giving as easy as possible. Dealing with the issue of giving and the heart is demanding enough, so eliminating barriers to giving is something we have to incorporate into our generosity culture. A target we suggest for our clients and frequently see is at least 60% of giving coming from channels other than the actual worship experience. Financial leaders tend to balk at the fees built into digital giving. An XP will need to concede these fees as a market reality. There is good news: the market seems to be forcing fees to lower levels. 

Second—There is consolidation going on in the space. Be alert as to who stands behind a platform, such as if the owner is providing service and if the tool is constantly undergoing improvements. Even with consolidation in the space, new tools are frequently emerging into the market. 

Third—Integration with your church data base and accounting are important to understand, making sure is workable in your current configuration. Do consider that the primary goal here is to increase giving by making the process easier and more seamless to how people financially do life. If a better giving app increases your giving, then needing a few additional steps internally is well worth those steps. I’d rather have $5,000 a month in giving with an extra few steps than $800 a month in giving with the value being what is easiest internally. 

Fourth—An app is not a magic solution to instantly increase giving. Each  platform will provide you with a process to announce and to integrate the tool into your setting. Successful installations, however, take far more time and emphasis to normalize and increase giving through the tool. The additional work is well worth it because an app will elevate giving over time with much of that giving chosen on a recurring basis by the giver.

Saturday, August 11, 2018

Pastor Buying a House in an Expensive Location

Question: Hey Fletch...Can you share insight into how churches in affluent areas are handling housing costs, especially for new staff members who move into the area? Here in our region, the median home price is $1,000,000. This has made it especially difficult to hire folks who are new to this crazy real estate market. I imagine you may have dealt with this and wondered if you know how other churches are handling it. Loans? Signing bonuses? Equity share? Lottery? Thanks for any insight you might be able to provide.

Answer: There are several parts of the country where your question literally “hits close to home.”

Some churches in California have a joint ownership program. The pastor puts up a percentage of the down payment and the church puts up the same. This can make it possible to buy a house. As co-owners, questions arise. What about repairs and renovations? If the pastor and church are 50% owners, does a committee represent the church if the pastor wants to add a new roof or another bedroom? You can see how co-ownership can get dicey.

Loans are interesting. There are some states that have laws about any incorporated entity loaning money—and California has some rules about this, but I don’t know about your state. Bottom line, before doing a loan, check with an attorney. Issues need to be ironed out in advance. What happens when the pastor retires, resigns or is fired? Do they have to sell their house immediately? If the pastor becomes a “pastor emeritus,” can he live in the house until he dies? Will the church then force the new widow or widower to pay back the loan or sell the home? Does the church have a second mortgage and will the primary lender allow this? Many lenders want a church loan to be a personal loan and not tied to the mortgage.

Common housing issues in high profile areas:

  • Few churches do a signing bonus of a significant amount to help buy a house.
  • Some churches increase salaries to help with local cost of living issues. They use national scales to understand how much housing costs are for their area.
  • Some pastors live in apartments.
  • Some families save for years before buying a house.
  • Some churches loan money or are becoming co-owners but this is dwindling due to the complexities involved.
  • Many churches overlook this area. “It’s the pastor’s problem.” In this scenario, only senior staff, or young staff with spouses in lucrative professional positions, can afford a house.
  • Many families are dual income. One spouse’s income pays the mortgage and the other pays for everything else.

Without working through the issues in advance, these scenarios can be spelled u-g-l-y.