Resource: International Churches and US Tax Exempt Status
Contact: Rick Wacek, CPA
Powerpoint Presentation: click here.
Rick lived in Indonesia a number of years working with Wyclife. He now divides his time between Fairfax, Virginia and Indonesia, and focuses on working with missionaries and 501c3s.
When we first started 10-15 yrs ago, it was relatively easy to be qualified as a tax exempt entity. If you were a church in the US, including an international church in the US, little to no reporting you had to do. Could be up and running as a church and non-profit in a couple of days. There were 14 requirements the IRS had at the time in order to receive tax-deductible contributions.
In the last five years there have been a lot of changes mainly in the banking and financial area.
A huge bill came out in 2009 that has a lot of implications for us. Add to that you have non-profits that are the leading source for terrorist groups and are being more closely scrutinized in their activities. And because of all the benefits churches started to enjoy, the process got taken advantage of by organizations wanting to dodge taxes.
The government changed now calls us a ‘foreign feeder organization’ (that is: churches with offices in the US who providing funding overseas.) It hasn’t yet become a problem but this is the trend.
Out of the 12-15 churches we serve, that’s the structure set up.
What are the benefits of a 501c3 tax exempt organization?
* When Americans donate to an international church they are saving as much as 45% on their taxes.
* Organizations like Google or Microsoft can make donation. For example, we know of a guy who worked for an oil company and made a gift to his church; his employer matched the donation to the church.
* Able to donate property like cars and get a tax write-off.
* Software companies want to give some of their products to non-profits.
* Opens doors to receiving things you can’t get unless you’re a nonprofit.
* Can get sales tax taken off things you buy in the US if they are for ministry – computers, etc.
* Medical, disaster relief contributions can provide tax deductions.
Doors are starting to close on non-profits. There are two options available.
- Form an association of churches – like 5-6 smaller IC’s. Then that group is tax-exempt and can process funds coming from wherever. And the association passes it on to the appropriate church.
- Form your own 501c3 organization. Based in the US, that organization can receive gifts, qualifies for tax exemption.
Different between type of arrangement no longer allowed and the new one is two things:
- Previously didn’t have to file any paperwork. Now to form a 501c3 there’s an annual report you have to file as a tax return and some paperwork.
- If your tax-exempt organization is receiving funds in the US – it has to go to a foreign organization.
Dave Kenney comment: AGWM missionaries pass donations thru AGWM. A lot of our churches don’t have an AGWM missionary. And can’t do that.
In our context, there are things we can’t do as a church such as a compassion ministry. So we have a compassion organization for those funds.
Receipt must say ‘ no goods or services were exchanged for these funds.’
IRS is scrutinizing the receipts. Must have donor’s name, amount of cash given, statement about ‘exchange of goods and services’ and if there were goods and services what was the approximate value of that. Date of donation, date receipt was issued.
Example: I know of a case in which the IRS said your receipt is not complete or sufficient. After the IRS threw out their deduction. Even though the church re-issued the receipt properly, IRS wouldn’t accept it.
Report of Foreign Bank and Financial Accounts
If you have an account or accumulation of accounts of $10,000 or more you have to report it to the IRS. Even if your name is on the account, you have to report it to the IRS.
Penalties are ridiculous. One case was a man who had $40,000 in a Swiss bank account. He didn’t report it and was fined $60,000.
If you haven’t done this in the past because you weren’t aware of it, and tell the IRS they possibly will not penalize it. On the tax return, there is a question that asks if you have any foreign accounts.
Must mark form ‘yes’ even if you have foreign accounts.