Faith-Based Accounting

Please don't sue me!

In our litigious society, it seems like people file lawsuits for just about anything, but since when did copyrights and licenses become so sensitive?  The old days are gone; the truth is, operating a Church becomes more and more complex every day.  So what are a few things an administrator can do to protect their organization?

 

Worship Music, for example, is majority owned by record labels.  The Christian artists usually make licensing deals with organizations like Christian Copyright Licensing International (CCLI.com), which in turn charges a yearly subscription fee based on the size of your congregation (starting for about $50 for a small congregation).  Some worship pastor's prefer to write their own music, which is great because you don't have to buy a license for their works.  However, then the question arises - who owns those songs he/she writes on the clock?  An intellectual properties policy can help clear up any confusion between you are your creative team.

 

Does your Church show videos in youth group or as an illustration in a sermon?  There are other groups for videos such as Christian Video Licensing International (CVLI.com) that sell affordable licenses to view certain protected materials within your organization.  

 

Even looking at your copy machine, it's a best practice to have a notice posted by each machine warning against the duplication of protected materials.  And finally, let's not forget about software.  Make sure that when you are buying software that you are respecting the software licensing agreement and abide by the notice as to how many computers and users that each license allows. 

 

Is your organization at risk?  Need help navigating any of these areas?  PSK can help!

 

 

--Daniel Lienemann, CPA is a Senior Auditor specializing in church accounting at PSK LLP.

YA MEAN I GOTTA DEAL WITH THE I.R.S.?

That’s right!  Even though churches normally do not have to file a tax return (most nonprofits have to file an informational return annually – IRS form 990), there is certain information that you must collect and provide to the IRS.  And I’m not talking about payroll tax information – 941 and W-2 forms.

If you pay at least $600 in a calendar year for the services of non-employees (and they are not corporations), you must get them to complete form W-9 (provides tax reporting information to you) and you must issue them an IRS form 1099-MISC.

 And if the church operates a preschool or private school that is not separately incorporated, you must file IRS form 5578.  This is a statement about racial non-discrimination.

 And if your church has “unrelated business income” of over $1,000 before deducting related expenses, you must file and IRS form 990-T.  Again, I’m not talking about net income of over $1,000; I’m talking about gross receipts of that amount.  And you could possibly have to pay income tax!  But that’s the subject of a whole new blog entry!

For more information, go to the IRS website – www.irs.gov.  Or even better, contact us at www.pskcpa.com.

 

 --Dan Williams, CPA, Church and Ministry partner at PSK LLP.

Be Thankful Even for Taxes

I have a friend who has reminded me to be thankful for annoying things such as the red light I am stopped at, because I am privileged enough to live in a country that has roads, and orderly ones at that. This same attitude can be applied to taxes—thankfulness for them and for the ability to pay them.

I wanted to start with this thought, because none of us like taxes. But we can be thankful for them, and also take care to report them properly. As additional incentive for excellence in this area, did you know that if payroll taxes are not withheld and paid to the IRS, the Church’s Board of Directors and employees may be personally liable? Some thoughts on ensuring your Church is addressing taxes appropriately:

Who performs the Church’s payroll? Even If the Church is fortunate enough to use an outside payroll service provider, it is still important that the Business Administrator ensure that the following are occurring:

• For all non-minister employees, the Church correctly withheld and paid the employees’ share of FICA taxes.
• IRS form 941 was filed for each quarter of the calendar year.
• The totals from the four quarterly 941 forms agreed with the totals on IRS form W-3, which is prepared at year end and filed with the IRS along with employee W-2s by February 28 each year.
•  Timely deposits of payroll taxes are made to the IRS. Required deposits vary. Generally, deposits may be made quarterly if total quarterly payroll taxes are $2,500 or less. Otherwise, deposits must be made monthly, or even more frequently for very large organizations.
• W-2 forms are provided to all employees (including ministers) by January 31.

How about your Church? Do you know for certain that payroll taxes are calculated, withheld, and remitted to the IRS correctly and in a timely manner?

 

--Justin Baldwin, CPA is a Senior Auditor specializing in church accounting with PSK LLP.

Nothing Petty about Cash

In the grand scheme of things – yes, it’s small change, but petty cash accounts are easy to mishandle and manipulate without proper oversight and controls. What controls are currently in place and are they followed? This is the primary focus of an internal audit of the petty cash funds.

Review the written policies governing petty cash accounts; looking specifically for what types and amounts of transactions will be reimbursed from petty cash, as opposed to a disbursement paid by check.

As with all expenditures, a voucher or request form should be completed and include the place, amount, and purpose along with the original receipt (dated within 60 days of the request). Review the general ledger and note the expenses accurately recorded and the funds replenished appropriately

Finally, count it. Make sure the cash and the receipts make up the total listed on the general ledger.

How many petty cash accounts does your organization maintain? Have you developed stronger controls than these to help ensure the integrity of your funds?

 

-- Lisa Chapman is an auditor specializing in church accounting with PSK LLP.

Making a List and Checking it Twice (Unsolicited Accounting Advice from Santa Claus)

Though "making a list" might sound simplistic, it is important to track a church's fixed assets at some level or another. Whether utilizing software specific for this purpose or general-use software such as Access, FileMaker or Excel, a church should develop a database of some sort to aid in this tracking process. Whatever solution it employs, churches should ensure that the database includes accurate relevant details such as the cost of the item, the date acquired, its service life, and any accumulated depreciation. Many CPA firms have depreciation software that can be utilized as well.

Once you make the determination of how to track this information, it should be input into the fixed asset module or another software program designed for maintaining fixed assets. Tracking property and equipment in a spreadsheet program like Excel can become an administrative burden, but is a viable solution in some instances.

A database should be kept up-to-date for insurance purposes as well as for proper accounting. These objectives might overlap, but each subset may contain different records, as the criteria for tracking are different. The church insures buildings and property in the event that there is a theft, tornado or some other tragic event, so having a detailed inventory of the church’s assets could be critical.  A current inventory listing of property and equipment allows the church to present to the insurance company an accurate record of the assets that were lost. This property and equipment inventory should include the date of acquisition, a description of the asset, quantity, and location.

In addition to a listing, we also suggest that a church make an annual video recording of the Church property. Such a video would slowly scan church property, panning each room carefully, and should be done at least once per year. It could even be a fun project for the youth pastor and a couple of students. The inventory listing and/or video should be duplicated and stored off-site for safekeeping.

Finally, churches should prepare a periodic reconciliation of the fixed assets or depreciation schedule to the G/L. That ensures that the physical listing agrees with the financial statements and records, thereby ensuring the accuracy of both.

A fraud resistant church will watch over its assets by maintaining accurate and thorough property records, taking periodic inventories of its holdings, and making security a priority.

What software do you use to track your fixed assets? Is it reconciled routinely? Do you tag your assets? When was the last time you performed a physical inventory?

 

--As National Relationship Manager with PSK LLP, Delton de Armas is a self-described right-brain dreamer solving left-brain problems, focusing on developing relationships with church leadership, layman, and other supporting professionals to help identify challenges and offer creative solutions. 

   

Know What You Owe

Both, a statement and a question!

Knowing what the organization owes as well as having confidence you have a complete and accurate picture really takes little to no effort. Start with a review of the debt amortization schedule.  This schedule should require all note obligations and commitments including mortgage, loans, and leases.

Review the schedule on a routine basis, maybe monthly, and verify all obligations are reflected accurately on the balance sheet. For added assurance, periodically request written confirmation of the balance owed, directly from the lender. This should correspond to the amortization schedule. One added measure is a review of the general ledger for regular payments for the items listed on, or excluded from, the debt schedule.

As busy as your organization is, it is easy to miss something when trying to put it all together at the end of the year; but it is also easy to ensure all debt and obligations are accounted for with these basic internal audit steps.

Please share your insight. How involved or simple is your debt schedule? What do you feel needs to be included to be complete?

-- Lisa Chapman is an auditor specializing in church accounting at PSK LLP.

It’s not just the thought that counts…

Your financial statements are a key to making decisions for your Church. Let me rephrase that…ACCURATE financial statements are a key to making GOOD decisions for your Church! 

I can’t stress enough just how true this statement is. Whether your Church is deciding to build a new campus, expand or remodel the existing campus, or even whether or not to purchase a new van for the youth trips, it is absolutely crucial that the Church is basing these decisions on accurate financial data.

A set of month end financial statements should be prepared on a timely (within 30 days) basis and submitted to the Church’s governing council. This “set” of financial statements should include at least a statement of financial position and statement of activities (more commonly known in the commercial industries as the balance sheet and income statement). The financial statements should include all funds: unrestricted, temporarily restricted, and permanently restricted.

Additionally, these financial statements should be reconciled with the amounts reflected in the accounting systems general ledger. For instance, if you pull an accounts payable aging report from your accounting system, does that total equal the amount you have recorded in accounts payable on your statement of financial position? It is very important that the Church’s sub-ledgers agree to the general ledger and financial statements. Two common fraud symptoms are a ledger that does not balance and that master account balances do no equal the sum of the individual customer or vendor balances.

How often is your Church preparing financial statements? What are some typical questions being asked by your Governing Council when reviewing these reports?

 -Tia Fisher is a Senior Auditor at PSK LLP, specializing in church accounting.

I owe you what??

In any business, having a high level of confidence in the amounts that are owed to various vendors is crucial. This fact is no different within our churches. The key to having this confidence is making sure adequate recordkeeping is maintained. Best practice guides stress that you should always have a consistent method for entering all invoices into your accounting system with the correct information provided on the invoice. This includes invoice number, invoice date, due date, amount, and a description of the products/services indicated on the invoice.

With all accounting software, you should be able to pull a report from your system that will show you a list of all unpaid invoices including the vendor name, invoice date, due date and amount. Having this report can help you examine various things; for instance, are there any accounts payable items that are significantly past due? If so, these should be researched further. Perhaps they have been paid, but due to an incorrect posting, were not removed from the accounts payable list, or maybe a certain invoice was mistakenly overlooked and is truly past due and, therefore, would need to be paid. Also, if there are ever any disputes with vendors over amounts owed, the accurate recordkeeping will give you the assurance you need in order to know whether or not the amounts have been paid in full.

From a fraud perspective, having the Church Governing Council review the unpaid invoice details regularly can hopefully uncover a possible fraud in the early stages.

What methods does your Church use to ensure accurate recordkeeping? Who reviews the unpaid invoice listing and how often?

 --Tia Fisher is a Senior Auditor specializing in church accounting with PSK LLP.

Can I Get a Receipt for That?

After evaluating whether a gift qualifies as deductible, the next most important consideration is the substantiation of the charitable contribution. In order to deduct a charitable contribution, a donor must obtain a written receipt from the charity if a single gift of cash or property is $250 or more.  The responsibility for obtaining a receipt (in the eyes of the IRS) rests with the donor, not the church. In order to qualify as substantiation, the receipt must include the following:

• The name of the donor.
• If cash, the amount given.
• If property, a description of what was given, but no value.
• A clause stating whether or not the donor received anything in exchange for the gift. “No goods or services were received in exchange for this gift other than intangible religious benefits.”
• The date of the gift.
• The date the receipt was given to the donor. Donors must receive receipts no later than the due date (plus extensions) of their income tax return. If the donor receives the statement after this date the gift does not qualify as a deduction!

The considerations for non-cash contributions raise an entirely new set of concerns. Some non-cash contributions might be better off refused. Certain gifts of property have a special set of requirements. In addition to the receipting requirements already described, there are specific considerations for non-cash contributions. For gifts of property in excess of $500 but less than $5,000, the donor must complete page one of IRS Form 8283. The church, however, has no reporting responsibility. For gifts of certain property in excess of $5,000, the donor must obtain an appraisal.

Substantiation of contributions, as well as the evaluation of gifts as charitable, are valid topics for a church's Contribution Policy.

Does your church have a formal contribution policy? Besides evaluation and substantiation, what other matters does (should) your Contribution Policy cover?

 

--As National Relationship Manager with PSK LLP, Delton de Armas is a self-described right-brain dreamer solving left-brain problems, focusing on developing relationships with church leadership, layman, and other supporting professionals to help identify challenges and offer creative solutions.  

Anyone want some money?

At that announcement the line begins to form.

Cash disbursements are easily the most manipulated, error prone process of any organization. Without proper controls and oversight in place, and in practice, money doesn’t have to grow legs and walk – it gets handed out. Maintaining an internal audit process of this area is essential and very easy.

Review the written policy covering the procedures for all transactions paid through the organization. The procedures should include the requirement for support of all disbursements, including the rare petty cash reimbursement.

Review documentation, such as a voucher or request form; it should be completed with the place, amount, and purpose along with the original receipt (dated within 60 days of the request) and a copy of the issued check or stub. Verify check stock is secure and account for all check numbers, including voided checks.

As an added measure, review the most recent cash disbursements against the general ledger to ensure they are recorded accurately.

Does your organization have an accountable reimbursement plan? Do you ever have a hard time getting receipts from employees?

- Lisa Chapman is an auditor specializing in church accounting at PSK LLP.