Most churches (and other nonprofits) like to give their donors a year-end donation acknowledgment letter. This letter serves two primary purposes: (1) It allows your donors to take a tax-deduction on the amount of money they have donated to your church and (2) It gives your church a chance to say thank you for the donations and ask for more donations in the future.

Let’s take a look at how to create this report within QuickBooks.

If you’ve researched using QuickBooks or if you have used it for your church then you know that creating this donor statement is not as easy as it should be. After countless soul-searching hours trying to find a solution to this problem I present you with three options:

• Option 1: Simple Contribution Summary
• Option 2: Simple Contribution Summary with Cover Letter
• Option 3: Third Party Software

Warning before Beginning

If you want accurate donor reports it is important that you enter donations and pledges using the method outlined in my book and recommended by QuickBooks (mainly that you don’t enter the donations using the “Make Deposits” option or the “Bank Register” option). If you use the wrong method to enter donations then your donor reports will be missing contributions. See illustration below for more detail.

If you use the register or deposits windows to enter donations it will ask you to enter the customer name, but it doesn’t tie the donations to the customer. This means that any reports you generate for the customer won’t include donations or pledges you entered using this method.

Option 1. The Simple Contribution Summary

This is the perfect solution for small churches that can simply hand out the reports at church or have a different system set up for mailing letters to members.

Simply fire up your QuickBooks NonProfit Version, click on reports, nonprofit reports, and then donor contribution summary (as shown in the picture below).

This will create a report of all the pledges (invoices) and donations made by donor as pictured below:

Now this report by itself is useful because it lists all contributions for the year by donor. However, it doesn’t really serve as an effective letter to donors because it crams all the donors onto the same page. There is a trick to get around this.

Click on print and then check the box called “Page break after each major grouping.” See picture below:

This will print out each an individual contribution report for each of your donors.

This report doesn’t quite fill all the requirements for tax-deduction purposes. It still lacks one thing: the legalese about not providing any goods or services in return for the donations.

Unfortunately QuickBooks doesn’t have an easy way to modify the reports to add this. Here’s a workaround that will work for smaller churches just wanting to fulfill basic requirements.

Click on modify report, then click on the header/footer tab (as shown below). Make sure the ‘Extra Footer Line’ checkbox is checked. Then add the following line: “No goods or services were given in return for donations.” You don’t have a lot of room in this box so you really have to keep it short but still fulfill the requirement.

Then click on ‘OK.’ Now look at your print preview and you’re set!

Obviously this method is not flawless. It’s a bare-bones approach. It doesn’t give you a chance to really communicate with your donors and it doesn’t print out envelopes with addresses on it. That’s why we have method 2.

Option 2: Simple Contribution Summary with Cover Letter

In this option you create the same report shown above, but you add a cover letter that has a bunch of feel good information and asks for the donors continued support. You can do this all within QuickBooks and Microsoft Word.

Step 1: Create the contribution summary report as shown above in Option 1.

Step 2: Click on Company, Prepare Letters with Envelopes, and then Customer Letters

Step 3: Choose all the donors you want to receive a letter or just choose ‘Active Donors’ and click ‘Next’.

Step 4: Click on Create or Edit a letter template and then click on ‘Next.’

Step 5: Click on ‘create a new letter template from scratch’ and then ‘Next.’

Step 6: Choose ‘Customer’ and then enter a name for the letter template. Click ‘Next’ and Microsoft Word should open up for you.

Step 7: Customize your Word Template

When I first did this I thought that I did something wrong because my word document looked completely blank and normal. If this is your experience, don’t worry you are in the right place.

In Word 2007 and 2010 you go to ‘Add Ins’ at the top and you will see that this is no ordinary document.

Add in the information you want for your letter. Here’s one I came up with that can serve as a guide for you.

I’ve highlighted in red some of the custom name fields that you can insert using QuickBooks. Take a look here to see what else you can add to these letters:

These little inserts or fields come in very handy. They allow QuickBooks and Microsoft Word to work together. Basically Word will grab the donor information from QuickBooks and then print out a letter for each individual donor.

Step 8: Go back to QuickBooks and click on Use Template. QuickBooks will then open up a single Word Document that has letters to each individual donor.

Step 9: You can then use either QuickBooks or Microsoft word to create envelopes as well.

Option 3: Use Third Party Software

There are two companies out there that have created a Microsoft Excel product that interacts with QuickBooks to make creating a year end thank you letter or contribution letter easier.

1. Beyond the Ledgers $50

2. Big Red Consulting  $59

Some churches prefer this method due to the professionalism and flexibility you have in creating your letters. There is still some setup required (it’s not a plug and play tool).

Conclusion

If you don’t need a sophisticated letter, then creating a year end donor statement in QuickBooks is easy. If you need something a bit more refined, then it can be a bit of a headache. Hopefully this tutorial helped you. Let me know if you have any questions.

1. QuickBooks is pushing people towards the online version.

2. Even the standard CD versions of QuickBooks Payroll are paid for on a subscription basis. The rationale behind the subscription is that the tax rates and forms are constantly being updated by QuickBooks so they are charging for their continuous service.

First look for this item within your version of QuickBooks.

Then you’ll see this window.

If you’re looking for the basic option, then you’ll need to click on “I want my accountant to pay and file my payroll taxes.” Your accountant doesn’t actually have to do this for you (many people do this without the help of an accountant).

Then you’ll see this window.

And there you have it, the basic payroll option.

Leave any questions below.

I get a lot of questions about the tax-exempt status of churches. I’ll attempt to answer some of them in the following paragraphs. If you want to read more in-depth about your church’s tax exempt status, then I’d recommend reading Section 501(c)(3) of the Internal Revenue Code. Also, the gracious people at the IRS also have this amazing publication: The Tax Guide For Churches and Religious Organizations.

The quick answer to your question is that churches do NOT have to file form 1023 in order to gain tax exempt status. Churches that meet all of the exemption requirements (discussed in depth in the above links) are automatically considered tax exempt.

Some Churches to File for Tax Exempt Status!

With that in mind, some churches do decide to apply for tax exempt status. Why in the world would anyone go through the headache of filling out more paperwork when it isn’t necessary? It makes people feel better. Your church can go through the whole process and pay an $850 fee to be officially recognized by the IRS as Tax Exempt. This makes some church leaders and contributors sleep better at night knowing that the IRS official recognizes them as tax exempt. It’s one of those things that isn’t necessary, but makes you feel more secure.

Does my Church have to File form 990?

The short answer to this question is no churches do NOT have to file form 990 (again, if you want all of the nitty-gritty you should read the IRS publications I listed above). Churches are exempt from having to file form 990, 990-EZ, or 990-N.

Now, if for some reason your church engages in “income-producing” activities that aren’t related to your church’s tax exempt purpose, then in this case the church does need to fill out form 990T. For example, if your church offers advertising, sells any merchandise, or charges the public for parking you may be required to file form 990 and pay income tax on the money earned from these unrelated business activities. Read pages 16 and 17 of this guide if you’re worried that your church may need to pay Unrelated Business Income Tax.

Conclusion

Fortunately most churches will get to worry about two less things than most nonprofit organizations. Churches don’t have to file form 1023 because they are automatically considered tax exempt. In addition, they don’t have to file form 990. Sometimes it’s good to be a church.

Other Useful Resources:

http://www.irs.gov/charities/churches/index.html

QuickBooks has multiple versions of accounting software. They don’t have any software that is specifically named “Church accounting software.” They do however have a QuickBooks Nonprofit Edition. This edition is very popular among churches and non-profits. According to several surveys from The CPA Technology Advisor about 70 percent of non-profits use QuickBooks. At least one CPA I have communicated with thinks that this number is closer to 90 percent for churches. In other words, a majority of churches are using this software for accounting purposes. The premium nonprofit version (as opposed to the normal version) would probably be the best to use for your church’s accounting system, although some churches get away with using normal QuickBooks, known as QuickBooks Pro.

Advantages of Your Church Using QuickBooks

The number one advantage of using QuickBooks NonProfit for your church’s accounting is its ease of use. Many people, even those without much of an accounting background, are able to use QuickBooks effectively. A learning curve does exist, but it isn’t as large a curve as trying to learn a specialized church accounting software system.

Another advantage of using QuickBooks is its customer support. When we mention customer support, we are not necessarily talking about the people at Intuit who designed the software (although they are excellent). Chances are you know someone who is already quite familiar with QuickBooks. Imploring them to help you set up and run QuickBooks as your church accounting software might be the best route for your church.

One final advantage that should be mentioned is the QuickBooks Online Payroll option. This service is well worth the cost for most churches. Let’s face it, most church staff don’t really have a clue how payroll works or how time consuming it can be. If you use this online service, QuickBooks will do the hard work for you (direct deposit, W2 calculations, tax help, and customer support for the questions that you’re bound to have). Intuit Online Payroll Easy to Setup and Use. Try Now FREE for 30 Days. QuickBooks has standard payroll software if you’re interested in that as well.

Disadvantages of QuickBooks

**Update** It appears that Intuit has fixed the audit trail problem mentioned below and it is no longer a disadvantage for nonprofits. Several users have even claimed QuickBooks audit trail is among the best: see comment section for further discussion. ***

In the past QuickBooks didn’t leave much of an audit trail in some situations. If an error was made by your church accountant, then he/she could easily reverse the error without leaving any evidence. This is no longer a problem. Errors can be corrected easily, but the software does a great job of leaving an audit trail documenting what actually occurred.

You may be thinking that being able to easily correct errors is something you want in your church accounting system. The downside of this is that it can be easily manipulated. Most church accounting software requires an adjusting entry when an error is made. This leaves what is called an audit trail so that a church auditor, loan officer, or banker can look back and see any adjustments made throughout the year.

A skilled church accountant could easily cook your church accounting books if proper internal controls are not in place. QuickBooks now has these controls in place and is now very safe to use as church accounting software.

One disadvantage of using QuickBooks Professional instead of QuickBooks Non-Profit is that it was originally designed for businesses, not churches. Intuit’s non-profit software will make it easy to support your church’s reporting requirements, but QuickBooks Pro may not support your church’s reporting requirements or terminology. This is especially true if they are not similar to a normal business’s reporting requirements and terminology.

In Review:

• QuickBooks can be used for your church’s accounting (some estimate that 90% of churches are using this software)
• Advantages include ease of use and great customer support ( a lot of people know how to use this software)
• Disadvantages include the fact that this software was originally designed for businesses. This was a larger problem when Intuit didn’t have a special version for not-for-profits.

Helpful Resource:

How to Create a Year-End Donor Summary Statement in QuickBooks

Recently, I was very fortunate to come into contact with the great people over at Shelby Systems. Shelby has been a major player in the church management and accounting software field for a long time now (since 1976). They were gracious enough to let me interview them today.

Questions for Shelby Systems

Nate: What separates Shelby Systems’ church management software from the other church software packages out there?

Shelby Systems: The first thing that comes to mind is experience. As the first church management software (ChMS) company in existence, we have both longevity and stability that make us stand out. Our customers appreciate knowing that we’ve been partnering with them in ministry for 35+ years and will continue to do so throughout the future as they grow. Speaking of growth, our software products are scalable to match your ministry as you continue to add members. We serve churches currently from < 300 in average weekend attendance up to 32,000 plus, as well as large nonprofits like The Salvation Army. Another feature that stands out is the built-in reporting capability. You can run a canned report with a click, customize your own using Shelby Query or Microsoft Reporting Services, or export any Shelby fields to Excel for additional customized reporting. Our customer service is well-known for handling any issues quickly and efficiently through a number of different channels. Our Community sites are available for collaborating and networking with peers through forums, or connecting directly with Shelby reps. Lastly, having ongoing releases via the web is priceless – no waiting for an annual or bi-annual release. As tax laws and tables change, you are ensured that your records are always compliant.

Nate: Would you be willing to send me a screenshot of what you consider to be one of the most useful features of Shelby Software? Why is this feature so useful?

Shelby Systems: Absolutely. Below, you’ll see a screenshot of a Budgeted Financial Statement. I chose this feature because of the simplicity that it provides with budgeting management. This is a detailed snapshot of your budget that you can run real-time for any number of periods (or annually). The data can also be exported to Excel for additional customized reporting. It’s your data and it’s immediately available in your preferred format so that you can create reports to meet your ministry’s needs. You can choose any number of columns of data to include, making it a key tool for church leadership.

Nate: It looks like you offer two different products for church management purposes: Shelby Arena and Shelby Church. Can you explain some of the major differences between these two packages?

Shelby Systems: Both Shelby Arena and Shelby Church are people (“non-financial”) management products and both integrate directly with Shelby Financials. However, there are some fundamental differences between Shelby Arena and Shelby Church, including technology, implementation and feature sets. On the technology side, Shelby Church is written in Visual Basic and Shelby Arena is written using the .NET platform. As it relates to implementation, Shelby Church is our legacy, client/server product and Shelby Arena is browser-based and available for you to host on your servers or as a SaaS model, with Shelby hosting your data for you. Concerning feature strengths, both products are full ChMS packages for people management, and with Shelby Arena, you also have a powerful Content Management System (CMS) to publish and power your ministry’s website. Shelby Church has online tools such as online giving & registration that you can publish to your website, but not a full CMS.

Nate: Under what circumstances should my church choose Shelby Arena? Under what circumstances should my church choose Shelby Church?

Shelby Systems: The key to choosing the Shelby software that’s right for your ministry is to take a full look at what you need with features, technology and your staff’s needs. Traditionally, Shelby Arena was used by large & mega churches as an enterprise-level product, but with the launch of Arena in the cloud, it’s now a viable option for any-sized congregation for people management.

Nate: Shelby Systems also offers Shelby HQ for headquarters management. Is this software only necessary for large multi-site churches?

Shelby Systems: No, actually multi-site and multi-tenant capabilities are available through any of our software products. Shelby HQ offers the same features that are built into our other products designed specifically for denominational headquarters offices, regional offices, and faith-based nonprofits.

Nate: It looks like there are two offerings for the HQ market: Shelby Arena and Shelby v.5. Is this the same Shelby Arena mentioned above? What are the main differences between Shelby Arena and Shelby v.5?

Shelby Systems: Yes, it is the same Shelby Arena we discussed before, however, with the addition of a large feature set designed for and with headquarters offices and nonprofit needs in mind. HQ feature sets are available in both Shelby Arena and Shelby v.5. The key differences are the same as we listed before with Shelby Arena and Shelby Church. When a headquarters, district, regional office, or nonprofit chooses Shelby, the features delivered within either product are specific to their needs.

Nate: What types of support are available?

Shelby Systems: Support with all Shelby software is bundled with maintenance & updates and varies based on a ministry’s Shelby package. It is an annual cost. There are a multitude of support options available to Shelby churches, including: phone, email, live chat, and live assist. Also, our Community sites provide you with forums, knowledge base, documentation, and training videos.

Nate: Does the Shelby Financial Suite come prepared to make financial statements that are in compliance with the FASB? What steps have you taken at Shelby to ensure accounting compliance?

Shelby Systems: Yes, we have the standard reports that comply with the FASB and GAAP principles. We take many steps to ensure our accounting compliance. We have a CPA on staff and a CPA certified in not for profit accounting that consults with us on a regular basis for future and current financial products.

Nate: What else would you like my readers to know?

Shelby Systems: I’m excited to announce to your readers that Shelby will be releasing an online financials product in 2012! We will be leading the way with this technology and we believe this will make our software accessible to an even wider array of ministries. As we mentioned earlier, Shelby Arena will also be available now as Hosted software (SaaS), which is a huge benefit to churches without paid IT staff or those who prefer to outsource their server maintenance and updates to Shelby. We’d also love to connect with your readers through social media. They can find us on Twitter (@shelbysystems), Facebook (fb.com/shelbysystems), Google+ (gplus.to/shelbysystems), and LinkedIn. Lastly, our annual conference occurs every June and we love to host anyone with questions about our software who would like to see it in action. You can find more info about the International Shelby Conference (ISC) at shelbysystems.com/isc. We’re also running regional demos, so be sure to ask us when we’ll be coming to a city near you. If you have any additional questions, feel free to contact us (shelbysystems.com/contactus) any time or if you prefer us to follow up with you, please go to shelbysystems.com/moreinfo.

Thank you so much to Nate for taking the time to chat with us and review our software. We can’t wait to connect with your readers. Be sure to tell us that Nate sent you!

Qualified Vehicles:

The IRS has developed guidelines regarding the donation of qualified vehicles to charities, which includes churches. The IRS has defined a qualified vehicle as :

• • • A car, or any motor vehicle manufactured mainly for use on public streets, roads, and highways,
    • A boat, or
    • An airplane

It should be noted that a car donated by a person who owns a car dealership would not be considered a qualified vehicle, but rather a donation of inventory.

Mechanics:

In most cases, the donor will transfer title of the vehicle to the church. Each state has different requirements regarding vehicle registration and title transfer. Please contact your local Department of Motor Vehicles to ensure that is being handled correctly. The donor will also provide the church with a claimed value of the vehicle. Once the church has the vehicle, they must determine if they are going to sell it, keep it, or give it to a needy person. The value of the vehicle also determines what type of reporting the church must provide.

Reporting Requirements of the Church:

Basically, the reporting requirement for the church depends if the donor valued the vehicle at $500 or less or at more than $500.

If the vehicle is valued by the donor at $500 or less, the church has two options on how to report the contribution. The two options available are:

• • • Provide a contribution receipt to the donor that lists the description of the vehicle, but not the value. Please refer to the non-cash article for details on the contribution receipt for non-cash donations.
    • Provide the donor with IRS Form 1098-C with Box 7 checked. In this instance where the value is determined to be $500 or less, the form should not be filed with the IRS.

If the vehicle is valued by the donor at more than $500, the church must file IRS Form 1098-C. Please see IRS Form 1098-C “Contributions of Motor Vehicles, Boats, and Airplanes” and Instructions for Form 1098-C for more details.

In order for the donor to claim an income tax deduction for the vehicle, the church must furnish copy B of Form 1098-C to the donor no later than 30 days after the:

• • • Date of sale if the car was sold at an auction by the church. or
    • Date of the contribution if the church is going to keep the vehicle for use by the church or if they are going to give it to a needy individual.

Penalties That Could be Imposed on the Church:

The church could face penalties imposed by the IRS if they fail to furnish IRS Form 1098-C to the donor, if they furnish a false or fraudulent acknowledgment or if they fail to furnish the acknowledgment in the manner and time required. These penalties all relate to the timely and accurate completion of Form 1098-C.

Income Tax Deduction For the Donor:

The donor can usually deduct the smaller of the gross proceeds from the sale of the vehicle by the church or the vehicle’s fair market value on the date of contribution. If the gross proceeds is the higher number, the donor must attach Form 1098-C that they receive from the church to their tax return. There are two exceptions to the above mentioned rule. The exceptions are:

1. If the church decides to keep the vehicle and use it in church operations or if they keep it and make improvements to it before transferring it, the donor can generally deduct the fair market value at the date of contribution. This will be handled on the Form 1098-C that the church will provide to the donor.
2. If the church gives the vehicle or sells it to a needy individual at a price below fair market value, the donor can generally deduct the fair market value at the date of contribution. Again, this will be detailed for the donor on the Form 1098-C that the church will provide to the donor.

Thank you for joining Icon Systems in this series on contribution reporting. We hope this has been informative to you. As always, please consult your CPA because you may have tax situations that are unique. Additionally, IRS rules are subject to change.

This current article will focus on how churches, donors, and the IRS handle contributions of stock and IRAs given to churches.

Contributions of Stock:

A contribution of stock is just another form of a non-cash contribution. As mentioned in earlier articles, the donor is responsible for obtaining the fair market value of the donation for his income tax return. Additionally, the donor is responsible to obtain from the church a written receipt for any single cash or non-cash donation in excess of $250. In no circumstances will the church put the value of the stock on the contribution receipt. They will, however, describe the stock on the statement.

Housekeeping Details:

If a donor wishes to donate stock to a church, how should they go about doing this? The donation will start by the donor sending the stock certificates and a signed stock power to the church. Alternately, the stock can be transferred directly from the donor’s brokerage account into the church’s brokerage account if they have one.

Is it better for the Donor to Contribute the Stock to the Church or to Sell the Stock first and then donate the Proceeds?

Like most everything in the tax world, the answer depends on the donor’s individual situation.
The donor may have stock that has appreciated in value since it was purchased. If he donates it to the church, he avoids having to pay the capital gains tax on the sale plus he can also take a charitable donation for the fair market value of the stock. It is almost like getting a double benefit for the donor! In turn, if the donor would realize a loss on the sale of stock, he would probably benefit by selling the stock first, claiming the loss on his tax return, and then donating the proceeds to the church.

Stock owned by the donor is classified as a capital asset and is taxed depending on how long the stock has been held. If the stock is held for more than 1 year and then sold, long term capital gains tax rates apply to any gain on sale. If the stock is held for 1 year or less, the gain is taxed at the ordinary income tax rates of the taxpayer. For 2011, the long-term capital gains tax rate is 15%. This is due to increase to 20% in 2012.

Lets take a look at some comprehensive examples of a donor who is thinking about either contributing his stock to his church or selling the stock first and then donating the proceeds to the church. The facts are as follows:

• • Donor purchased 10 shares of XYZ stock on 1/1/2000 for $300.
  • Donor contributes the 10 shares of stock to his church on 11/1/2011.
  • The fair market value of the 10 shares of stock on 11/1/2011 is $1,200.
  • The long term capital gains tax rate for 2011 is 15%
  • The long term capital gains tax rate for 2013 is 20%

• Example 1: Donor sells the stock for $1,200 on 11/1/2011 and donates the proceeds to the church:
  • The gain on the sale of the stock is $900 ($1,200 sales price less $300 cost basis)
  • The gain on the sale is taxed at the long-term capital gains rate. The donor pays $135 ($900 * 15%) tax on the gain on his income tax return.
  • The donor makes a cash donation of $1,065 ($1,200 proceeds less $135 tax paid)
  • The church enters the cash donation on the donor’s contribution record and supplies the donor with a written receipt for the donation of $1,065.
  • The donor takes a charitable income tax deduction of $1,065.
  • The church records a debit to “Cash” and a credit to “Contribution Revenue” in the amount of $1,065.

• Example 2:  Donor sells the stock for $1,200 on 1/1/2013 and donates the proceeds to the church:
  • The gain on the sale of the stock is still $900.
  • Since the sale is made in 2013, the donor is subject to the long term capital gains tax rate projected to be in effect for 2013. As of the writing of this article, that rate is 20%. The tax on the gain is $180. ($900 * 20%)
  • The donor makes a cash donation of $1,020. ($1,200 proceeds less $180 tax paid)
  • The rest of example 1 applies here except the amount is changed from $1,065 to $1,020. Notice that waiting to make the sale in the new year results in the payment of $45 more tax for the donor and receipt of $45 less donation for the church

• Example 3:  Donor contributes the stock to the church on 11/1/2011
  • Since the stock is being donated and not sold, the donor does not need to report or pay any tax on the capital gains.
  • The church will provide the donor with a receipt that provides a description of the stock “10 shares of XYZ stock” but will not include a monetary value on the receipt. This is because the donor is responsible for determining the fair market value of the donation, not the church. See the non-cash donation article for more details on determining fair market value of non cash donations.
  • The church should record the stock donation on their books at fair market value as of the date of donation. In our example, this is $1,200. The church would make an accounting entry to debit “Investments – Stocks” and credit “Contribution Revenue” for $1,200.
  • The church sells the stock on the same day for $1,200. The accounting entry the church should record would be a debit to “Cash” and a credit to “Investments- Stock” for $1,200.
  • In order for the donor to take an income tax deduction on their tax return, they must complete IRS Form 8283. In our example, the amount for the taxpayer would be $1,200. This amount would be recorded in Section A of Form 8283.
  • If the amount of the stock in our example were over $5,000, the donor would need to complete Section B of Form 8283. If this section is completed, the donor will ask the church to sign the Section called “Donee Acknowledgment”. See IRS Form 8283 “Noncash Charitable Contributions” for more details.
  • Additionally, if IRS Form 8283 Section B 1 is completed because the donation is over $5,000, the church must complete IRS Form 8282 if the donated property is sold within 3 years of receipt. See IRS Form 8282 “Donee Information Return”. This form must be mailed to the IRS within 125 days after the date of sale.
  • Notice in this example how the donor does not pay tax on the appreciation of the stock and receives a donation for the appreciated amount. In turn, the church receives the full benefit of the appreciated stock. In our example, if the church later sold the stock for a gain, it wouldn’t matter because the church does not pay tax.

Charitable Contributions Received from IRAs

In 2006, a tax situation was created that favored individuals age 70 ½  or older to make qualified charitable distributions from their otherwise taxable individual retirement accounts (IRAs). The provision expired at the end of 2009. In 2010, as part of the 2010 Tax Relief Act, the provision was extended through December 31, 2011. As of the writing of this article, it is not known if this benefit will extend to the end of 2012.

This benefit works a little differently in that it does not result in an income tax deduction but results in an exclusion from gross income. To understand this better, lets take a closer look at it.

Individuals under the age of 70 ½ by the end of the year and who have taxable income are eligible to open a Traditional IRA. A Traditional IRA may be tax deductible or non-tax deductible on the individual’s tax return depending on a number of different factors. See IRS Publication 590 “Individual Retirement Arrangements” for more information. When the person reaches age 70 ½, they must start taking money out of the account. The amount they have to take out each year is prescribed by the IRS and is called the required minimum distribution. This distribution is taxable income to the individual and is included on their tax return. (Notice how the traditional IRA differs from the ROTH IRA. The traditional IRA receives tax deductions when the money is contributed to the fund but is taxed when the money is taken out. The ROTH IRA has no tax breaks when the money is contributed to the fund, but is not taxed when the money is taken out).

The current tax law due to expire 12/31/2011, states that individuals age 70 ½ or older may distribute up to $100,000 per tax year directly from their Traditional IRA account to a church without having to include the distribution in their gross income. This results in the payment of less income tax. The distribution to the church can also satisfy the required minimum distribution limits. In order to claim this tax benefit, the individual must obtain the proper contribution receipt from the church, even though the individual is not taking an income tax deduction. Generally, the church will receive a check from the administrator of the IRA. The church should record this money received on the individual’s contribution statement with a description of IRA proceeds included. If the church received shares in the IRA, then the contribution statement should be handled the same as the receipt of stock.

As always, please consult your CPA because you may have tax situations that are unique. Additionally, IRS rules are subject to change.

Icon Systems appreciates bringing these resources to churches hosted by Church Accounting Software Guide. The last one will deal with the receipt of automobiles, boats, and other vehicles by churches.

Definition:

Non-cash contributions are also known as gifts in kind. They can be anything from office supplies, computer equipment, books, stocks, real estate to automobiles. It is important to keep in mind that the church should either be able to use the donated property as a part of their operations or they should be able to easily sell the donated property and use the proceeds for church operations. If the donated property can fulfill one of the two requirements, the donor may be able to take a charitable income tax deduction on their tax return.

What about volunteers who work in the church? They are definitely necessary in the operations of the church. Should their services be reported as non-cash donations and they in turn take income tax deductions on their tax returns?  Isn’t this just another form of a non-cash donation? Unfortunately, the IRS has stipulated that you can not receive a charitable income tax deduction for the value of your time or services.

Another area that needs to be further examined is the importance to distinguish between a tax deductible non-cash donation to a church and a non-tax deductible personal gift to a minister that may need to be included in his gross income. Donations of a personal nature, whether cash or non-cash, are not considered charitable contributions but rather personal gifts. They are not tax deductible and may need to be included in the gross income of the minister.

Lets take a look at some examples and see what their tax consequences may be:

• Example 1: Donor gives two cases of paper to the church
  • The paper can be used in the normal operations of the church. The donor may be able to take an income tax deduction for the paper.

• Example 2:  Donor gives land to the church.
  • The land can be sold with the proceeds going toward the normal operations of the church. The donor may be able to take an income tax deduction for the land.

• Example 3:  Donor gives a computer to the minister to work on at home. It is used by the entire family.
  • The computer is deemed a personal gift to the minister. The donor can not take an income tax deduction for the computer.

• Example 4:  Donor gives a computer to the church office. The minister will be the primary user of the computer. The computer will stay at the church and will be used for church work exclusively.
  • The computer will be used in the normal operations of the church. The donor may be able to take an income tax deduction for the computer.

• Example 5:  Donor is a volunteer who works 10 hours per month in the church office. There is one paid office staff position at the church that pays $8.00 per hour. The volunteer would like a statement from the church that shows they work 10 hours per month in order to claim an income tax deduction.
  • The IRS does not allow an income tax deduction for the value of your time or services. No income tax deduction will be allowed for the volunteer.

Now that we have seen some examples of what non-cash donations are, lets take a look at the reporting requirements the church may have.

Reporting Requirements of the Church:

What reporting requirements does the church have, if any, if they receive non-cash donations?

Basically, the donor is responsible for obtaining a written receipt from the church for any single cash or non-cash contribution of $250 or more in order to claim an income tax deduction. Although the church is not required to provide a receipt, they may want to help the donor in this process since most churches rely on the generous support of their members. The church receipt should contain the following information:

• • Name of the church
  • Amount of cash contribution
  • Description (but not the value) of non-cash contribution
  • Statement that no goods or services were provided by the church in return for the contribution, if that was the case
  • Description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution
  • Statement that goods or services, if any, that the church provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

Value of Non-Cash Donations for the Contribution Statement

The value of a non-cash donation is not recorded on the contribution statement sent to the donor. This is because the church is not responsible for determining the value of the donation in regards to the donor’s income tax return. The donor is responsible for coming up with this value. The donor will usually do this by consulting with his CPA and using the fair market value as outlined in IRS Publication 561 Determining the Value of Donated Property. Although the value is not stated on the contribution statement, a detailed description of the donated property is. (i.e. 300 shares of Microsoft stock)

Value of Non-Cash Donations for the Financial Statement

Although the value of non-cash donations are not recorded on the contribution statements, they are recorded on the financial statements of the church. This would involve an accounting entry that is not linked to the individual contribution module. The entry would be a credit to contribution revenue and the debit would depend on the nature of the donated property. For example, if paper was donated, the debit could be to office supplies expense. The dollar amount to be used should be the fair market value of the property at the date of the donation.

Benefits to the Donor of Non-Cash Donations

There are some real benefits to donors who contribute non-cash items to churches. Most of the benefits occur when they donate property that has appreciated in value. For example, lets say a donor purchased stock 10 years ago for $100 and on December 1, 2011  the stock has a fair market value of $1,000. If the donor sells the stock for $1,000, they will receive $900 in cash and will need to report a $900 long term capital gain on their tax return. (For purposes of our example, lets use a long term capital gains rate of 15% for 2011). After paying federal tax of $135 on the gain, the donor then has $765 available to donate to the church. The church would then receive a cash donation of $765 and the donor would be able to receive an income tax deduction for $765.

Now lets take a look if the donor donated the above mentioned stock to the church on December 1, 2011. The church will receive the stock and will issue a contribution statement to the donor describing the property – but not the value- received. The statement may say something like “200 shares Microsoft stock” and may list the stock numbers. The church intends to hold on to the stock for a period of 5 years. The donor has determined that the fair market value at the date of contribution is $1,000. This is the amount he will receive as an income tax deduction. Notice that the donor does not need to record or pay tax on a long term capital gain. In turn, the church decides that the fair market value of the stock on the date of contribution is $1,000. They will record this on their books as a debit to “Investments- Stock” and a credit to “Contribution Revenue” in the amount of $1,000.

What Other Forms Should I be Aware of Regarding Non-Cash Donations?

As indicated before, the church is not responsible for a lot of the reporting regarding non-cash donations, however, as a service to their members, it would be advantageous for them to be aware of some of the additional forms involved with non-cash donations.

Some of the additional forms involved with non-cash donations include:

• IRS Form 8283- If the donor values the non-cash property at more than $500, they are required to complete IRS Form 8283. If the donated property is valued over $5,000 the IRS requires it to be listed in Section B Part 1 of this form. If Section B Part 1 is completed, in order to obtain an income tax deduction, the donor will require the church to complete Section IV “Donee Acknowledgment”. Additionally, the IRS will require the donor to obtain a qualified appraisal for property listed in Section B Part 1. Please refer to IRS Form 8283 “Noncash Charitable Contributions” for more information.

• IRS Form 8282 – If the donor lists the non-cash property on Section B part 1 of Form 8283 as described above, IRS Form 8282 must be completed by the church if the church sells or disposes of the donated property within 3 years of receipt. This form needs to be completed and mailed to the IRS within 125 days after the date of sale. Please refer to IRS Form 8282 “Donee Information Return” for more information.

The above article does not apply to the donation of vehicle or boats. That topic will be addressed in a separate article.

As always, please consult your CPA because you may have tax situations that are unique. Additionally, IRS rules are subject to change.

Icon System’s looks forward to bringing this contribution series to churches and other non-profits so they understand the complex reporting regulations better. The next article in this series will deal with the receipt of stock and IRAs by churches.

Part 1

With the Holiday season and year end rapidly approaching, it might be a good time to review the reporting requirements for churches who receive contributions.

General Requirements:

As tax exempt organizations, churches are qualified by the Internal Revenue Service (IRS) to receive contributions from donors. Since qualified churches are not subject to federal income tax, these donations are tax-free to the church. Donors, in turn, may be able to deduct their contributions to churches on their income tax return. In order to take advantage of these special tax situations, the IRS has developed rules that apply to donors and to churches regarding contributions. These general rules are as follows:

• In order to claim a federal income tax deduction, the donor must have either a bank record or a written communication from the church.
• The donor is responsible for obtaining a written acknowledgment from the church for any single cash contribution of $250 or more.
• The church is required to provide a written disclosure to a donor who makes a payment in excess of $75 and the payment is partly for a donation and partly for goods and services received.

Lets take a detailed look at these three general rules and then move on to specific situations that churches may face.

The donor must have either a bank record or a written communication from the church :

For cash, check, or other monetary donations made after January 1, 2007, the IRS requires that the donor have either a bank record (i.e. cancelled check) or a written communication (i.e a receipt or letter) from the church in order to claim an income tax deduction. This requirement places the responsibility of obtaining the necessary documents on the donor. Although the church will not incur a penalty if they do not provide this information, the donor may not be able to deduct the donation on their income tax return without it.  This may affect future contributions that the donor wished to make. Since most churches rely on the generous donations of their members, it may benefit them to assist the donors in this process. The written church communication to the donor should include the following:

• the name of the church
• the date of the donation
• the amount of any cash contributions

The donor must receive a written acknowledgment from the church for any single cash or non-cash contribution of $250 or more:

The donor cannot claim an income tax deduction for any single contribution of $250 or more unless the donor receives a written acknowledgment from the church. The church can either provide separate acknowledgments for each single contribution of $250 or more or one acknowledgment for several donations of $250 or more. The total yearly contributions are not added together to arrive at the $250 threshold. For example a written acknowledgment would not be required for a donor who donates $10 per week for 52 weeks (total of $520) even though the total is more than $250. If the donor made only two contributions of $260 each, then they would need a written acknowledgment. As mentioned in the first rule above, the church would not incur a penalty for neglecting to furnish the proper receipt, but churches who value their donors may wish to provide it. If the donor claimed an income tax deduction for the contribution and did not receive the proper receipt, the IRS could disallow his contribution on his income tax return. Again, this could affect any future contributions that the donor wished to make. This written acknowledgment should include the following:

• the name of the church,
• the date of the donation,
• the amount of any cash contributions,
• a description (but not the value) of non-cash contributions.
• In addition to the above, the written communication must contain one of the following statements:

• • “No goods or services were provided by the church in return for the contribution.”

• • “Goods or services that the church provided in return for the contribution consisted entirely of intangible religious benefits.”  Or

• • A description and good faith estimate of the value of goods or services other than intangible religious benefits that the church provided in return for the contribution.

The church is required to provide a written disclosure to a donor who makes a payment in excess of $75 and the payment is partly a donation and partly for goods and services received.

Sometimes churches host charitable events where the public needs to purchase a ticket to attend. Donors can only take an income tax deduction for the portion of the payment that is in excess of the fair market value of the goods or services received. For example if a church charges $100 for a “Fall Festival” which includes a meal valued at $30, the donor can only take a charitable deduction for the portion that exceeds the fair market value of the meal. In this example, the charitable donation would be $70. Even though the charitable portion is under the $75 threshold, a written acknowledgment is required because the total payment was in excess of $75.

In addition to the name of the church, the date of the donation, and the amount of the payment, the written disclosure should include:

• A statement that “ The amount of the contribution that is deductible for federal income tax purposes is limited to the excess of money (and the fair market value of any property other than money) contributed by the donor over the value of goods or services provided by the church.” AND
• Provide the donor with a good faith estimate of the value of the goods or services received by the donor.

The IRS calls the above mentioned donations quid pro quo. Further details about them can be found in the IRS code section 6115. The IRS can also impose a penalty to churches who do not follow the above rules. These penalty amounts can be found in IRS code section 6714. Section 6714 states as follows:

• • (a) Imposition of penalty – If an organization fails to meet the disclosure requirement of Section 6115 with respect to a quid pro quo contribution, such organization shall pay a penalty of $10 for each contribution in respect of which the organization fails to make the required disclosure, except that the total penalty imposed by this subsection with respect to a particular fundraising event or mailing shall not exceed $5,000.
  • (b) Reasonable cause exception – No penalty shall be imposed under this section with respect to any failure if it is shown that such failure is due to reasonable cause.

In plain English, this means that churches could be penalized $10 for each quid pro donation that was not properly disclosed with a penalty cap of $5,000 for each fundraising event. Proper disclosure means that it follows the rules mentioned above. Additionally, the IRS can impose a penalty to the church of $1,000 per person per year for aiding and abetting an understatement of tax under IRS code section 6701. This means that “the church knows or has reason to believe that members will rely upon the contribution statements the church provides in connection with reporting their tax liability and that the reliance on those statements will result in an understatement of tax.” Serious stuff indeed!

The IRS does allow some exceptions to the above rule. If an exception is met, the church does not need to provide the fair market value of the goods or services received by the donor on the contribution receipt or statement. These exceptions are as follows:

• Token Exception
• Membership Benefits Exception
• Intangible Religious Benefits Exception

Lets take a look at the three different types of exceptions listed above.

Token Exception:

• Insubstantial goods or services a church provides in exchange for a contribution do not have to be described or valued in the acknowledgment.
• Goods and services are deemed insubstantial if the payment occurs in the context of a fund-raising campaign in which the church informs the donor of the amount of the contribution that is a deductible contribution and:
  • the fair market value of the benefits received does not exceed the lesser of 2% of the payment or $96, or
  • the payment is at least $48, the only items provided bear the organization’s name or logo (i.e., calendars, mugs, or posters), and the cost of these items is within the limit for “low-cost articles”, which is $9.60.
  • Free, unordered low-cost articles are also considered insubstantial.

The insubstantial goods or services dollar amounts listed above are for 2010. Guideline amounts are adjusted for inflation. Contact IRS Exempt Organizations Customer Account Services at (877) 829-5500 for annual adjustment information.
Membership Benefits Exception:

• An annual membership is considered insubstantial if it is provided in exchange for an annual payment of $75 or less and consists of annual recurring rights or privileges, such as:
  • free or discounted admissions to the church’s facilities or events
  • discounts on purchases from the church’s gift shop or library
  • free or discounted parking
  • free or discounted admission to member-only events sponsored by an organization, where a per person cost is within the “low-cost articles” limits.

Intangible Religious Benefits Exception:

• Benefits provided by the church that are not usually sold in commercial transactions
• Examples include wine served in a religious ceremony, admission to a religious ceremony, and receipt of a church newsletter.
• Benefits that are not intangible religious benefits include tuition for education leading to a recognized degree, travel services, and consumer goods.

Please refer to the “Charitable Contributions – Substantiation and Disclosure Rules” portion of the IRS publication “Tax Guide for Churches and Religious Organizations” or the IRS publication  “Charitable Contributions – Substantiation and Disclosure Requirements” for more information. As always, please consult your CPA because you may have tax situations that are unique. Additionally, IRS rules are subject to change.

Icon Systems’ IconCMO addresses all of the unique situations above for churches and we look forward to working with your organization.