Religious organizations may technically be classified as nonprofit organizations, yet they are subject to a unique set of accounting rules. Anyone providing accounting services within a religious organization must be aware of special policies that can affect the organization’s compliance and tax status.
Here are just a few accounting considerations religious organizations should be aware of:
1. Oversight
Unlike the average nonprofit organization, religious organizations are often governed by the rules of a larger governing entity, like an archdiocese. This oversight body often sets its own rules as to when each organization needs an audit, review or compiled financial statement. This results in a large number of religious organizations with an improper level of financial reporting, which can affect their compliance.
2. Allowability
Generally Accepted Accounting Principles (GAAP) are the accounting standards issued by the Financial Accounting Standards Board (FASB) that are used by CPA firms if that organization’s financials need to be prepared with GAAP. However, many religious organizations elect to use the cash basis, modified cash basis or accrual basis of accounting, while choosing not to follow all GAAP requirements. This is often determined based on the requirements of the organization’s governing entity.
3. Payroll
Some religious organizations have special rules regarding payroll, like payroll for ministers. Generally, an organization is not required to withhold federal income taxes for ministers. In addition, certain payments for parsonage and housing allowances are not taxable to a minister.
4. Reimbursement of Business Expenses
Reimbursement of business expenses is sometimes handled incorrectly at religious organizations. If any employee is reimbursed for expenses incurred, and the employee accounts for those expenses with an expense report, those expenses are not taxable to the person. However, if the employee is given a type of expense allowance and no documentation of the expenses incurred is provided to the organization, those payments should be included in that person’s payroll.
5. Taxes
While religious organizations are generally exempt from taxes, that doesn’t mean every activity the organization undertakes is tax-free. There are activities that can cause an organization to be subject to unrelated business income taxes (UBIT) as well as tax compliance issues. Here are just a few examples of activities that could cause a religious organization to be liable for income tax:
- Endangering tax exempt status through lobbying or political activity beyond that which is allowed
- Selling significant amounts of advertising
- Sale of merchandise, if not related to the tax exempt purpose of the organization
- Rental of real property
- Payment of parking or commuting expenses for employees
6. Charitable Contributions
Compliance issues often come up as a result of solicitation and recognition of charitable contributions. Any contribution a religious organization receives that exceeds $250 is supposed to be acknowledged in writing by the organization via receipt. The acknowledgement should have information regarding the donation as well as statements as to whether anything was received by the donor in return for the contribution.
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