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Timely reconciliations of all bank accounts are a critical function of your accounting personnel.  It is necessary to verify that the account balances are correct and helps to detect any fraudulent activities as soon as possible.  In order to strengthen internal controls, it is also highly advisable to have the reconciliations done by someone other than the person who makes deposits and/or writes checks.

Any transfers between checking accounts that have not cleared during the month are an indication that either the transfer did not actually occur, or that the bank made an error.  Un-cleared transfers should be researched right away.  The same would apply to un-cleared deposits.  Unless the deposit was made near the end of the month, it should clear in the month it was deposited.

If you have un-cleared checks after a few months (or worse, years), research to see if the check is lost and needs to be re-issued, or if it should be voided.  Often we find that the check was re-issued, but the original check was never voided in the system.

While your bank accounts can be “reconciled”, if you have old un-cleared items, your cash balance is not properly reflected in your accounting software.   We have seen account balances that are reconciled but which are over or under-stated by tens of thousands of dollars due to old transactions which need to be voided.

Most churches that I have worked with reimburse church employees for business expenses incurred on behalf of the church. However, in order to reimburse the pastor (or any employee) for business (church related) expenses, the church needs to adopt an “accountable reimbursement plan.” According to IRS guidelines, an accountable reimbursement plan must include all three of the following: 1. Expenses must have a business purpose incurred while performing services as an employee of your employer. 2. Employees must adequately account for expenses within a reasonable period of time, defined by the IRS as no more than every sixty days. 3. Any excess reimbursement or allowance must be returned within a reasonable period of time. It is customary for a church to write a check to a minister prior to a trip to cover his expenses. However, in order for the payment to be considered a reimbursement for business expenses, the minister must turn in receipts, with required documentation – what the expenses are for, with whom did he or she meet, the topic discussed, and so forth. Any unused funds must be returned promptly at the return of the trip. If documentation of the expenses is not provided, or unused funds are not returned, the payments could be reclassified as taxable income to the minister. Many ministers instead use a church credit card. While this is much easier, it does not relieve the need to turn in receipts with required documentation. Furthermore, if the credit card is used for any personal charges, the same rules apply for returning the money to the church within a reasonable amount of time. If a minister receives a car or auto allowance and is not required to substantiate the amount of business miles via a detailed mileage log, then the allowance is a non-accountable reimbursement arrangement and should be added to his W-2 as taxable income from the church. If a log is kept, any amount paid over the allowable IRS mileage rate should be added to the minister’s W-2. If the church owns the vehicle used by the minister, a mileage log still needs to be kept, and the value of the personal usage added to the W-2 at the end of the year. Otherwise, the IRS could determine that all use of the vehicle is personal. It is not sufficient to estimate what percentage of the vehicle use is for business or personal use. (There is a formula used for calculating the value of the personal use.) Please note that mileage from home to the church is not considered a business expense; this is personal commuting expense. Finally, some ministers keep a log but choose to write-off the mileage as an unreimbursed business expense on their tax return instead of getting reimbursed from the church. I have yet to see a scenario where this option is beneficial to the minister. As an employee, the reimbursed business expense is listed on Schedule A, and only the portion that exceeds 2% of adjusted gross income is deductible. The minister is better off to get reimbursed for business mileage at the IRS approved rate. If the above rules are followed, the reimbursement is not subject to taxation.

The tax code gives ministers the ability to have a portion of their compensation earned in ministry designated toward housing expenses. Properly designated, this portion of the minister’s income is excluded from income for federal income tax purposes. There are a few rules which must be followed: The designation must be officially designated by the church governing board or compensation committee. A definite amount must be designated: The designation cannot be made retroactive if the minister is part-time, or does not earn more from ministry than his actual housing expenses, then the church can designate 100% of the minister’s pay as a housing allowance. Since the designation cannot be made retroactively, always include language in the resolution to include future years (i.e.: “this allowance is for 2010 and all subsequent years until and unless changed”). This will protect the pastor from losing part of his housing allowance in the event that the board does not approve the next year’s housing allowance prior to the beginning of the year. In determining how much to designate as a housing allowance, the minister should add up all housing expenses including house payment, real estate taxes, insurance, utilities (including trash and home phone), furnishings and appliances (purchases & repairs, furniture, pictures, etc.), structural repairs, remodeling, yard maintenance, landscaping and maintenance items (cleaners, light bulbs, pest control). Don’t forget the little things – flowers, mulch and gas for the lawn mower – it all counts. There is a limit to how much housing can be claimed and excluded from income. The amount allowed is the smallest of: 1. The actual amount of allowable expenses 2. The amount officially designated as a housing allowance 3. The fair market rental value, including utilities & furnishings It is a good idea to set your housing a little higher than you think you will need to cover any unforeseen expenses. Any housing allowance received that exceeds the actual expenses (or the fair market rental value including utilities and furnishings) should be added to taxable income on line 7 of Form 1040. Although the housing allowance is not required to be reported on the W-2, it is suggested that it be listed in box 14 of the W-2, which is for information purposes only. Do NOT put housing allowance on a form 1099. If 100% of the minister’s pay is designated as housing, we suggest a letter on church letterhead be given to the minister stating the amount of housing allowance paid for the year. This will assist him if he needs to show the income when getting a loan, etc. Although the housing allowance is exempt from federal income tax, unless a minister is exempt from social security taxes, the allowance is subject to self employment taxes. Other notes:  If a minister is retired and still receives a housing allowance, it is not subject to self employment taxes = 100% tax free (certain restrictions apply).  Home equity loans used to pay for a car, college education, medical expenses, etc. cannot be considered a housing expense.  Although the designated housing is not subject to federal tax, the minister can still deduct mortgage interest and property taxes on schedule A of income tax return.  Payments to evangelists can also be designated as a housing allowance  If a minister is in a lower tax bracket, it is not always better to have a higher housing designation. Some available tax credits could be lost, resulting in more federal tax being paid or a lower refund. Delano Sherley is a CPA from Cincinnati, Ohio. He is president and owner of Delano Sherley and Associates. He has over 25 years experience working with privately held companies and churches. He can be reached at 513-737-1314 or Delano@dsacpainc.com. The above article should not be construed as accounting or tax advice on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your own advisor concerning your situation and any specific accounting or tax questions you may have. Under U.S. Treasury Regulations, we are required to inform you that any tax advice contained in these materials is not intended to be relied upon, and cannot be relied upon, as substantial authority to avoid penalties under the Internal Revenue Code. Great effort has been made to insure the accuracy of the material in this publication; however, the author shall not be liable for any damages claimed by any person as a result of any information contained herein for any reason, including but not limited to, those by reason of errors and/or omissions. If you have any questions on any of the enclosed materials, please call us.

How does your church spend its money?

Delano Sherley, CPA

The current economic downturn has certainly had an effect on non-profit organizations. With charitable
contributions down an average of 7%, many organizations have been forced to take a closer look at
expenditures to see which expenses can be reduced or eliminated and how to best allocate the
resources available.
This process is very healthy. During good economic times and periods of growth, organizations tend to
spend more and get more lax with how funds are spent. I have seen this lead to devastating
consequences, which could have been avoided had the church reacted sooner. Preparing an annual
budget helps give the church a clear picture of where the church is allocating its funds, and also provides
a tool to show what areas can be reduced if revenues begin to fall. Studies show that 21% of churches
have recently had to reduce spending, with 18% reducing payroll related expenses. Reviewing expenses
and making sure they are in line with income helps prevent a crisis further down the road. The process
also helps identify areas where expenses can be reduced to allow more funds in areas that the
leadership wants to focus on.
This process is not only important for a church suffering from decreased revenue, but also for a church
experiencing a period of growth. If the growth creates a need to expand, and additional financing is
needed, the historical financial statements need to reflect the ability to make the payments on the
increased debt. Banks want to see how the church can make the payment based on the previous couple
of year’s income, not on where the income might be based on your projected growth.
During the process, the question often comes up “how much should we be spending on various budget
areas?” One writer suggested the following for a healthy church:
Personnel: 40-50%
Operations: 20-30%
Department Expenses: 10-20%
Evangelism/Missions: 10-25%
Another writer suggested 25 percent for each category, although I have yet to find a church that can
balance the budget this evenly. Payroll related expenses are always the largest budget item.
While these percentages are only suggestions, a church will find that if one area takes up a higher
percentage of the budget, they may not have the funds available to operate in other areas as they
would like. For example, if you are spending 70% on personnel, the church will not have enough funds
for operations and outreach. One exception to these suggestions would be for younger churches, where
the personnel expenses may be higher until the church grows. A survey conducted by our firm found
that for those churches that responded, 34% of the budget was allocated to payroll related expenses.
A church that has to spend more than 25-30% of their budget servicing debt likewise will find itself
straining to meet the other financial needs of the church.
A recent survey showed the following average breakdown for churches:
Personnel 42%
Building 20%
Missions/outreach 15%
Programs 16%
Administrative 7%
At the end of the day, how a church allocates its resources should be a reflection of the vision of the
pastor. I know of a church where the pastor’s heartbeat is missions, another where community
outreach is his focus, and still another where he feels called to expand the church facilities to
accommodate anticipated growth for the end-time revival in his area. Each church should allocate funds
to reflect the vision God has given the pastor of that church. In order to fulfill the vision, more resources
will be allocated to the vision, and less to the other areas of the budget.
Just like one’s personal finances, the church budget reveals the churches priorities.
Delano Sherley is a CPA in Cincinnati, Ohio. He is president and owner of Delano Sherley and Associates. He has
over 25 years experience working with privately held companies and churches. He can be reached at 513-737-1314
or Delano@dsacpainc.com.
The above article should not be construed as accounting or tax advice on any specific facts or circumstances. The
contents are intended for general information purposes only, and you are urged to consult your own advisor
concerning your situation and any specific accounting or tax questions you may have. Under U.S. Treasury
Regulations, we are required to inform you that any tax advice contained in these materials is not intended to be
relied upon, and cannot be relied upon, as substantial authority to avoid penalties under the Internal Revenue Code.
Great effort has been made to insure the accuracy of the material in this publication; however, the author shall not be
liable for any damages claimed by any person as a result of any information contained herein for any reason,
including but not limited to, those by reason of errors and/or omissions. If you have any questions on any of the
enclosed materials, please call us.