Best practice funding-the_mission

1

Best Practices of Churches and Districts

Presented by Mark R. Patrick, CPA

District Treasurer

North Florida District

May 19, 2010

2

Who is the Local treasurer?

• Elected by church board annually (128, 129.20)

• Member of local church, may be member of pastor’s immediate family only with district permission (129.20)

• Reports to church board (129.21)

• Makes available all records to pastor and to audit committee (129.23)

3

Local Treasurer’s Duties

• Receive funds and pay bills (136.1)

• Keep correct accounting of funds (136.3)

• Monthly detailed report to church board (136.4)

• Report annually to congregation (113.8, 136.5)

• Surrender complete records when term ends (136.6)

• Don’t handle funds or count offering (129.22)

• P&BP&B Web site has additional help (www.PBUSA.org)

4

Who is the District Treasurer?

• Elected by district advisory board for up to three-year term (219)

• Nominated by district superintendent (219.1)

• Ex-officio member of district assembly (219.2)

• Make available all records to district superintendent and to audit committee (129.23)

5

District Treasurer’s Duties

• Receive funds and pay bills (220.1, 413.17)

• Keep correct accounting of funds (220.2)

• Monthly report to district superintendent for distribution to advisory board (220.2)

• Report annually to district assembly (220.2)

• Amenable to district assembly (220.2)

6

What Is good governance in a church?

• Governance is the nature & operations of the board

• The board sets policy through active engagement with independent & informed oversight of church staff

• The board evaluates staff & programming by observation & open interaction with staff

• Each board member has responsibility to oversee the ethics of the entire church

7

What Is good governance in a church?

• Church staff is responsible for the execution of the policies established by the board

• Open communication of all activities promotes integrity & accountability to each other

• The “tone at the top” determines the success of all functions of the church through written policy and ethical implementation of all programming

8

Definition of Internal Control“Internal control is broadly defined as a process, affected by an entity’s board of

directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in

the following categories:

• Effectiveness and efficiency of operations

• Reliability of financial reporting• Compliance with laws and regulations”

9

Definition of Internal Control

“A management tool used to provide reasonable assurance

that management’s objectives are being met”

10

Elements of Internal Control

1. Control Environment - Sets the tone and influences the control consciousness of the organization

2. Risk Assessment – Forms the basis for determining how risks should be managed as an ongoing process

3. Control Activities – The policy and procedures that help ensure directives are carried out.

11

Elements of Internal Control

4. Information and Communication – All personnel must receive a clear message from top management that control responsibilities must be taken seriously.

5. Monitoring – Internal control systems need to be monitored – a process that assesses the quality of the system’s performance over time.

12

Components of Internal Control

Internal control relies on principle of checks and balances:

• Personnel – trustworthy, competent with clear lines of authority and responsibility, written job descriptions

• Authorization Procedures – Approval authority commensurate with the nature and significance of the transactions.

13

Components of Internal Control

• Segregation of duties – limit individual responsibility to only one of the three transaction components: authorization, custody and recordkeeping

• Physical restrictions• Documentation & record retention• Monitoring operations –

reconciliations, confirmations, exception reports, etc.

14

Why does this concern us?

In a 2008 study of 959 cases by the ACFE…• $944 billion was estimated lost to fraud• 14.3% of the fraud occurred in the not-for-

profit sectorIn a 2002 study by Grant Thornton…• Median loss in not-for-profit cases was

$100,000, up from $40,000 in 1998• 45.8% of the frauds occurred in

organizations of less than 100 employees, with their median loss being $98,000

15

Fraud Theory Triangle

OpportunityOpportunity

RationalizationRationalizationPerceivePerceived Needd Need

Ability/Ability/AgilityAgility

We Should Assume Everyone Will Commit Fraud!

16

Does your Church have Internal Controls?

• Independence

• Separation of Duties

• Supervision

• Rotation of Responsibilities

• Periodic Audit of Books (para. 129.23)

17

Tactics For Fraud Prevention• Clearly establish the “tone at the top.”• Visible prosecution (and conviction) of

perpetrators.• Stringent and highly restrictive internal

controls.• Technology-enabled continuous

monitoring of all financial transactions.• Government regulations.

18

Best Practices

Questions???

19

Church & ClergyTax & Business Issues

Presented by Mark R. Patrick, CPA

District Treasurer

North Florida District

May 19, 2010

20

21

How do we handle payroll?

• All who provide regular services to church and do not have an independent business that services others are employees, except clergy

• Employees other than ordained or licensed pastor are subject to payroll tax liability and withholding

• Church must match Social Security & Medicare tax

• Church must file quarterly 941 (or 944) and annual W-2s

22

How do we handle payroll?

• Federal law exempts NPO from unemployment tax

• Forms 1099 are required for independent contractors paid $600 or more

• Remember to keep in personnel files:• W-4 (http://www.irs.gov/pub/irs-pdf/fw4.pdfhttp://www.irs.gov/pub/irs-pdf/fw4.pdf)

• W-9 (http://www.irs.gov/pub/irs-pdf/fw9.pdfhttp://www.irs.gov/pub/irs-pdf/fw9.pdf)

• I-9 (http://www.irs.gov/pub/irs-pdf/fw9.pdfhttp://www.irs.gov/pub/irs-pdf/fw9.pdf)

23

How do we handle payroll?

• Clergy have special payroll rules• Withholding not required as pastor pays SE tax,

but are still employees receiving a W-2 form• Any compensation approved in advance &

accounted for as housing is income tax exempt, but not SE tax

• Expense allowances not part of an accountable plan are added to W-2 income

• Qualified fringe benefits are not taxable on W-2

24

How do we handle payroll?

• Fair Market Value (FMV) of uncollected rent for provided parsonage is reported to pastor and is subject to their SE tax

• Many districts have policy that local churches reimburse all or part of SE tax to pastor, which is added to W-2 income

• Employee use of church equipment is subject to payroll withholding

25

How do we handle payroll?

• Passenger vehicles – personal use• Commuting only - $1.50 each way per

day• With mileage records - standard

mileage rate• FMV of personal usage – generally

when over 50% personal use• Equipment – personal use

• FMV if not de minimus or for telecommuting

26

How do we handle payroll?

IRC Sec. 62(a)(2) and 62(c) requires reimbursements for business expenses & travel (including amounts paid under per diem rates) to meet certain tests for an accountable plan to be exempt from employment taxes.

The three requirements for an accountable plan:1. Business connection & reasonable amount.2. Reasonable accounting for the expenses.3. Excess reimbursements repaid in a reasonable time.

For Test #2, amounts paid up to federal per diem rates are deemed substantiated, without receipts.

27

How do we handle payroll?

• IRC Sec. 105 allows entities to establish medical reimbursement plans to reimburse qualified medical expenses which are exempt from payroll taxes

• There are two types of plans:• Insurance only• Expense reimbursement

28

How do we handle payroll?

• Plan document required

• Must meet discrimination test for participation

• Accountability similar to business expense plans

• Often MRP is a part of a Sec. 125 Cafeteria Plan

29

What about personally provided benefits?

• Is church use of personal vehicle covered?

• Self paid health insurance cannot be reimbursed tax-free unless under medical reimbursement plan

30

Do you have UBTI in your church?

• Unrelated Business Taxable Income must be reported on a Form 990T if it exceeds $1,000

• Three test determine UBTI:• A trade or business,• Regularly carried on, and• Not substantially related to exempt

purpose• Remember to include allocated expenses

31

Do you have UBTI in your church?

• Day care or school, under church’s supervision is exempt

• Be sure activity is insured for specific risks

• If you rent to others, it may be included if the property includes debt

• Be sure they name you as insured up to your own liability limit

• See IRS Publication 598 for more info

32

What qualifies as a charitable contribution?

• Cash, check or credit card payment with no material benefit to donor

• Can be designated, but without personal control of its use and non-refundable

• Year-end must be received by a church official or postmarked by midnight 12/31

• In-kind services or in lieu of rent do not qualify for charitable deduction

33

What qualifies as a charitable contribution?

• Gifts received but designated for an individual are not deductible unless church has independently solicited for such activity

• Charities are expected to provide a giving receipt either after each gift or a the end of each year (no goods or services other than intangible religious benefits were provided in exchange for this gift)

34

Your Church & the Hire Act

• Effective - February 9 through December 31, 2010

• Credit equal to employer FICA for hiring an unemployed individual

• Employee certifies unemployed on W-11

• Out of work most of last 60 days

• Cannot replace a terminated employee

• Credit taken on Form 941/944

35

What about insurance?

• Liability insurance is recommended up to $3 million

• Include all staff and their counseling liability

• Include board and officers’ E & O coverage

• Include named drivers of church vehicles• Consider bonding all who handle church

funds• Understand exclusions and deductibles

36

What about insurance?

• Workers’ compensation is wise even if not required by state law

• If operating day care or school, have specific liability insurance for that risk

• Is non-church use of church vehicle covered?• Listed and approved drivers may be

required.

37

Church & Clergy Issues

Questions???

38

Funding the Mission in the Church of the Nazarene

It’s a Whole New Game for 2010

39

The Old System• Budget for U.S. only churches based

on modified expenses of each church• No one understood it, so distrust

grew, since its inception in the 1950’s• Contributions had been declining for

3 decades• Over 75% of the districts did not

follow the “official” system

40

Why Was It Changed?• To improve support, a cap was added in

the 90’s at 26% of funds raised, gradually to 20%. It didn’t help enough

• The 2005 General Assembly formed the Budget Allocation Committee to study & propose a “tithe” based plan to replace allocation system

• The charge was to:– Meet the mandate of the General Assembly– Plan to raise approximately the same amount

as before

• It seemed impossible!

41

The New Plan• All giving & denominational budgets

reported to GTO – ideally each week• Income based plan replaces expense

based one• The pastor’s report is much simpler• NMI awards are all renamed, but

similar goals

42

Effect on Budget Recipients• WEF expects a $39.5 mm budget

down from $51

• P & B expects approximately $250k increase

• Trevecca expects same income if 100% participate

• Districts can adjust rate to maintain income

43

The New Plan• Total Receipts is the Base

• WEF is based on ----- 5.5%

• P & B is based on ---- 2.0%

• TNU is based on ------ 2.5%

• Amount for Others = 10.00%

• NFD is based on ------ 5.25%

44

Transition Rules• Begins as each district starts the

2010-11 year• Most churches (75%) have a lower

budget• Churches with > 25% increase can

have four year phase-in• “Rare exception” provision-included

• Designated gift policy-included

• Few other special breaks

45

How The Math Works

Percentage Factor

What You Would Expect

What It Really Is

What It Could Be

100.00% YTD Church Income $ 1,000.00 $ 1,000.00 $1,000.00

5.50% WEF Contribution $ 55.00 $ 51.98 $ 51.98

Mission Specials Contribution     $ 100.00

2.00%Pensions & Benefits Contribution $ 20.00 $ 18.96 $ 16.96

2.50% Education Contribution $ 25.00 $ 23.70 $ 21.20

5.25% District Contribution $ 52.50 $ 49.77 $ 44.52

46

What If? Calculator

47

What If? Calculator

48

What If? Calculator

49

Local Church Reports• Planning calculator

– https://fundingthemission.nazarene.org/https://fundingthemission.nazarene.org/FundingTheMission/auth/whatIfCalculator.xhtmlFundingTheMission/auth/whatIfCalculator.xhtml

• Reporting income– https://fundingthemission.nazarene.org/https://fundingthemission.nazarene.org/

FundingTheMission/auth/reportIncome.xhtml?FundingTheMission/auth/reportIncome.xhtml?rvn=1rvn=1

• Transaction history– https://fundingthemission.nazarene.org/https://fundingthemission.nazarene.org/

FundingTheMission/auth/transactions.xhtmlFundingTheMission/auth/transactions.xhtml

50

Reporting & Paying Online

• Global Treasury System– http://fundingthemission.org

• District Website– http://www.NFLNAZ.com

• Can be one time or recurring payments

51

Individual Giving Online

• Main Nazarene website to select ministry– http://web.nazarene.org/site/http://web.nazarene.org/site/

PageServer?PageServer?pagename=DonationSplashpagename=DonationSplash

• Then complete payment arrangements

• If designated, local church gets credit for 10% special giving

52

District Payments• Access through ww.NFLNAZ.com ww.NFLNAZ.com • Select drop down under Financials• Select District Budgets or Functions• Select application of payment• All payments except budgets and

insurance can be Credit or Debit Card, or ACH draft

• Budgets & Health Insurance page is being updated

• Recurring can also be done manually

53

District Website

54

District Website

55

Where do denominational budgets go?

• EDU budget paid directly to regional school (TNU), plus scholarships and matching gifts

• To GTO: P&B, WEF, LINKS, 10% giving, Alabaster, Compassionate Ministries, local W&W trips, etc. Bible College, Seminary, ABS direct to them

• To district treasurer: district budgets, youth and children’s mission projects, registrations, district W&W trips, NAILS club, etc.

56

Where does district money go?

District budget covers:• Travel expenses for delegates to General

Assembly and Conventions

• Disability premiums for all active clergy

• Home mission support• Departmental budgets (NMI, NYI, SDMI)• Other district ministries

57

Where does district money go?

District budget covers:

• Staff compensation and travel

• Office rent, utilities, staff & supplies

• Property and liability insurance

• Travel expenses for boards and committees

58

The New Plan

• The Church of the Nazarene needs our support to “Fund the Mission” to “Make Christ-like Disciples in the Nations”

59

The New Plan

Questions???

60

More help or questions?

Mark R. Patrick, CPA

District Treasurer

4029 Atlantic Blvd

Jacksonville, FL 32207-2036

[email protected]

904-396-5400 (voice)

904-396-9226 (fax)