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Clergy Compensation Comes Under US Tax Court Scrutiny
Clergy Compensation Comes Under US Tax Court Scrutiny 1024 682 The Provisum Group

I recently learned of another court ruling that further clarifies how clergy are compensated.  Now I am no accountant and I encourage you to always consult a licensed CPA, like those at The Provisum Group, for tax advice.

The US Tax Court & Board of Tax Appeals recently released a decision against two Minnesota husband-wife pastors, who claimed that they did not receive any income from their church but rather gifts directly from their congregation.

As a charismatic congregation with a tradition of giving gifts directly to clergy, Reverend and Mrs. Felton, the clergy at issue in the case, were uncomfortable with the practice called “shake-hand money” but wanted to respect their congregation’s spirit of generosity. They developed a system that relied on different colored envelopes where white envelopes went towards traditional tithes and offerings and blue envelopes replaced the practice of “shake-hand money.” The Felton’s earnestly believed that these blue envelope gifts were simply gifts and not considered taxable income. The Internal Revenue Service thought otherwise.

In 2008 and 2009, the Felton’s were comfortably living on income from a business, also owned by the Pastors, and only asked the church to provide them a housing allowance. This threw up a red flag to the IRS.

While there is no written rule about how much of your salary can be drawn in a housing stipend, my accounting team advises all of my clients that it be no more than 50% of your clergy compensation. If audited by the IRS, clergy are required receipts for every penny spent of the housing allowance received from their church or ministry.

As the IRS began digging into the Feltons’ finances, they learned about the colored envelope system and slapped them with a tax bill and penalties for the “substantial understatement” of their income. In early October of 2018, Judge Mark Holmes of the US Tax Court & Board of Tax Appeals ruled that the IRS was correct in their assessment of the Feltons’ taxes and in doing so provided more guidance in what is considered a “love gift” and what is to be counted as clergy income.

As ministry leaders, we are called to be blameless and above reproach in all things. If you are unsure if your housing allowance or love gift practices are in compliance with IRS guidelines, give my team a call at The Provisum Group. Our team of accounting professionals can help get your books in order and keep you in compliance with government regulations. Feel free to contact us HERE.

You can read the Felton v. Commissioner decision HERE.

Ministerial Housing Allowance Goes Back To Court
Ministerial Housing Allowance Goes Back To Court 1024 682 The Provisum Group

As President of The Provisum Group, I lead a group of talented professionals who manage the finances of churches and faith-based charities across the country.  Every day, we have to ensure compliance for our clients with laws, regulations and judicial precedents of a multitude of different federal, state, and local regulatory agencies. There is one situation, however, that has the potential to affect every ministry across the country.

Last year a federal court in Wisconsin ruled that the ministerial housing allowance was unconstitutional. Since then, the case has been appealed. You may be wondering what does this mean for your ministry.

The Provisum Group is accredited by the Evangelical Council for Financial Accountability.  The ECFA is one of the largest and most respected financial accrediting agencies for churches and faith based charities in the country.  Below is an article from the ECFA that explains where the court battle currently stands:

The minister’s housing exclusion faces its next battle in a 7-years-and-counting war with the Freedom From Religion Foundation. A Wisconsin federal district court ruled in October 2017 that the housing exclusion for minister-provided housing is unconstitutional, a ruling that could ultimately strike down the allowance nationwide, resulting in nearly $1 billion in new taxes for ministers across the country. An appeal to the Seventh Circuit Court of Appeals was filed by Chicago-area pastors in early February 2018.

While the appeal will not reach the courtroom until later this year, The Becket Fund for Religious Liberty, representing pastors on the South Side of Chicago and other religious leaders, filed its opening brief on April 19. Further, several organizations, including ECFA, The Lutheran Church – Missouri Synod, the National Association of Evangelicals, the Union of Orthodox Jewish Congregations of America, Council of Churches of City of New York, Queens Federation of Churches, and the Christian Legal Society, filed an Amicus Brief to the court detailing the longstanding history of the housing allowance and the devastating financial consequences that would be felt by ministers and churches if this provision is found unconstitutional.

“The housing-allowance exemption has roots going back to the inception of the modern federal income tax. Predating the Tax Code, the practice of providing housing for a minister…crossed the Atlantic with the colonists,” states the Amicus Brief. The document goes on to offer illustrative figures that demonstrate that if the housing allowance were invalidated, “ministers and congregations that have relied on it in good faith would suffer substantial ‘disruptive effects’ – especially small congregations and retired ministers, who have ‘the least ability’ to absorb the resulting costs.”

The housing exclusion was established by Congress in 1954 to protect ministers, as well as business leaders, teachers, military personnel, and other workers who need to live in a certain community to perform their jobs, from tax treatment that would put them at a disadvantage and make it difficult if not impossible for them to serve their community.

Becket stated in the opening brief, “Home is where the heart is. But home can also be an essential part of a job. That is why, for over 100 years, the IRS and Congress have recognized…that if an employer provides an employee with housing for the ‘convenience of the employer’ – that is, as ‘part of the maintenance of the [employer’s] general enterprise’ – it is not income.”

Over the last 60 years, the convenience-of-the-employer doctrine has been applied to hundreds of thousands of nonreligious employees, not just ministers. Further, the spirit of the doctrine is particularly germane to the work of clergy because often their home is where they provide counsel, prepare congregational messages, host missionaries, welcome new members, and in many cases, hold services because the church lacks its own facility.

As the appeals process continues, the fate of many pastors and churches hangs in the balance. If the lower court’s decision is not overturned, churches in the Seventh District (Illinois, Indiana, and Wisconsin) would be immediately affected, and since the IRS federal tax code applies to all states, the decision could prompt a review by the U.S. Supreme Court.

If you feel like you need assistance keeping up to date on the various laws that affect you and your ministry, please get in contact with me using the button to the right or contact my business, The Provisum Group, for more information.

Update on Constitutionality of Housing Allowances
Update on Constitutionality of Housing Allowances 570 379 The Provisum Group

Late last year a federal judge ruled that the housing allowance received by clergy was unconstitutional. With the passage of new tax laws at the federal level and in light of this ruling many pastors are asking themselves, “what happens now?” I wanted to share with you some information put together by the ECFA that brings a little clarity to these questions.

A ruling was issued in October 2017 by a Wisconsin federal district court calling the minister’s housing allowance unconstitutional.

What is the immediate impact for ministers and churches?

As of this publication, there is no immediate impact on ministers receiving a housing allowance from their church or other employer. The longer-term impact hinges on whether appeals are filed in the case.

If No Appeals Filed

It’s possible there will be no appeals filed in the case by the government or other parties impacted (“intervenor defendants”), meaning the district court’s decision will begin to apply immediately after the deadline expires for them to file an appeal.

If Appeals Filed

However, there is a good chance the government or other parties impacted will appeal the decision at least to the Seventh Circuit Court of Appeals and possibly even to the U.S. Supreme Court.

An appeals court could disagree with the lower court and find the housing allowance constitutional. In the alternative, if the lower court ruling is upheld on appeal, the district court’s ruling states it will not go into effect until 180 days after the appeals process concludes.

What about ministers living in parsonages?

The district court further clarified in its follow-up ruling that this decision does not apply to Section 107(1) of the tax code. In other words, the ruling has no impact whatsoever on ministers living in church-provided housing (“parsonages”).

Winners Want To Keep Score
Winners Want To Keep Score 792 600 The Provisum Group

My three adult sons were all year-round athletes in high school. My wife and I were endlessly sitting in hot, smelly gyms or on cold rainy sidelines for almost twenty years. My kids grew up in a generation where everyone got a trophy. My generation taught the next generation that winning is just showing up. We taught them that results (score) don’t matter…criticism is mean…expectations are insensitive. We robbed an entire generation of the lessons to be learned from failing and the strength of character that is born in the struggle.

The school district where my sons competed did a really good job of having robust junior-varsity teams where everybody got to play. However, on the varsity, only the best players played and sometimes played both ways. If you were on the varsity, you knew you might not get in the game. Eventually, some parents started showing up at school board meetings, complaining that they pay athletic fees but their children (on the varsity) might not get into a game. These parents argued that if they pay, their kids should play and after all, “winning did not matter.” At one school board meeting, a mother was arguing this very point with great intensity. She concluded with, “After all, winning doesn’t matter. It’s how you play the game.”

Then, the star of the football team stood up and asked a question.
“If winning does not matter, then why do we have a score board?” he asked.
The purpose of score (measurement) is to recognize desired behavior (or lack thereof) and determine a winner (declare success). By declaring a winner, the score also identifies the team that lost. It is unavoidable. Most elite athletes want to live in a world with competition and score. Most top performers want to work in an environment where results are measured and people are expected to do what they say they are going to do (perform).

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As a seasoned leader of more than thirty years, I am always suspect of someone who equates accountability (measurement) with a lack of trust or who wants to lower the standard they do not meet because the standard is in some way “not fair.” I have learned that if you question the integrity of honest people, they will in some way demand an audit. Conversely, if you audit dishonest people, they will usually try and turn the audit into a question of character. Top performers aren’t afraid of audits (accountability).

Top performers like a scoreboard. They don’t like working in organizations with no accountability or follow-through. If top performers have to constantly deal with late meetings, unmet goals, poor performance, unreturned emails, and endless debates over desired outcomes, they will grow frustrated and many will move on. They won’t put up with the chaos forever and the truth is they don’t have to. The truth is top performers have options. Every team has and needs top performers. Ask the Miami Heat if they would rather play with Lebron James or against him and are they a better team without him.

What do you spend most of your time doing? Discussing anecdotal opinions, debating the validity of reports, questioning the performance of others, or arguing over what is “fair”? Or do you spend your time getting things done, exploring how things can be done better next time, and who produced the desired outcome (and who did not)? If you have not been achieving the goals you have set for yourself, if you want to win, maybe you should ask a top performer how they do it. Be prepared to hear words like “accountability,” “consequences,” “results,” and “risk.”

Top performers want the score kept. Poor performers don’t.

Do Hard Conversations Promote Growth?
Do Hard Conversations Promote Growth? 792 600 The Provisum Group

Do Hard Conversations Promote Growth?

Not always.  But avoiding them usually hinders growth.

In church business, we are called to steward and to lead.   The stewardship side of our role is to manage the church’s assets like our own.  Stewardship requires that we do what is right regardless of the resistance to a decision.  The leadership side of our role means we advocate for doing what is sound and wise regardless of the popularity.   Anytime you’re in a leadership role, you’ll be faced with having hard conversations. As many of us know, there might be friction. It may be something we don’t want to do, but we are called to make the tough decisions and have these discussions.

Here’s a key principle to always remember: Friction is a by-product of movement. Without friction, there is no movement.

As the church begins making strides towards growth and change, you may be met with friction. Friction can be disguised as many names but more often than not, it’s labeled as conflict. Conflict isn’t something to be avoided, but should be dealt with quickly and directly.   Avoiding conflict can be a luxury we award ourselves at the cost of progress and stewardship.  Conflict is an opportunity to grow and learn, not something to shy away from.

I’m reminded of a time when I was working with a fellow pastor, helping him through a series of changes within his church. One day, after the Sunday service, we stood talking and I noticed a dilapidated building that needed to be torn down. The pastor decided to get a quote from a contractor in the congregation to destroy the old building. The amount was five digits long and much too expensive for what needed to be done. Ultimately, we went with another company but not before the pastor had to have a hard conversation with the member of his congregation.

The pastor dreaded the potential conflict, but the contractor ended up being very understanding and helped the church choose the right company for the job. In the end, the best possible conclusion was achieved and the church was able to continue forward.

The question most of us face is: How do you go about having these conversations without feeling awkward and tense?

Here are 3 tips to remember when it’s time to broach a tough subject:

  • You’re on the same side— allow the person space to process and ask questions. Approaching the situation as two people on the same side rather than on opposing sides will help you both talk through the issue and grow from it.
  • Be Assertive—it won’t help either of you if you’re not willing to be straightforward. There’s a difference between being forthcoming and honest and just being blunt or rude. But someone has to be the first to acknowledge the 800 pound gorilla in the room.
  • Seek a Solution–No matter how hard the conversation is, it’s vitally important to edify the other person as you talk about the topic at hand. Lowering walls and coming to someone in humility will help alleviate any pressure they feel. Work towards an outcome that’s honoring to both parties involved.

We often do somersaults when dealing with church business to ensure that no one is offended.  If there is no conflict in your ministry, you probably aren’t doing much. Having sound business people around you to help you have these conversations is a great way to add checks and balance to your system. They can advise on best practices and can be a sounding board to bounce effective ideas off of.

As you consider the various business dealings within your church, is there a hard conversation you’ve been avoiding?

Don’t Just Work In It. Work On It.
Don’t Just Work In It. Work On It. 1024 640 The Provisum Group

In order to become a great leader you must learn to make things better in your organization. The first way to start to make things better is to ask great questions. Great questions lead to better answers and more clarity about the true and current status of your organization. Once you have true and clear picture, you will have a better chance of plotting a course of action that will improve and grow your church, non-profit, or business.

As a church consultant, I have audited many church financial balance sheets. The audit process can often feel painful to staff members, but it is necessary to insure organizational health.

In the same way, leaders must audit their ministries, systems, and models. Why? Ministry auditing makes things better.

Andy Stanley, of North Point Community Church offers six questions that every leader should ask on a regular basis. These are great questions.

  1. Do I have the right people at the table? Do I have the right people who are informed to make the right decisions?

I like this question because without the right people, you really have nothing. The wrong people in the wrong positions always lead to the wrong decisions and the wrong results. If you manage others in your organization, you must ask if you have the right people in the right positions.

  1. Where are we manufacturing energy? Where are we pretending? Where are we trying to convince people to go to that we don’t want to go to ourselves?”

There is a difference between buzz and hype. Buzz means that there is a groundswell of interest. Hype means that somebody is trying to sell others on being interested. In your organization, you want buzz. You want people to want to do the ministry activities. You must regularly guard against yourself and your other staff from trying to make things happen that just don’t have genuine interest.

  1. Where do I make the greatest contribution to the organization?”

This question leads you to self-evaluation. Let’s face it: you’re not really good at everything. Don’t believe me? Just ask your spouse. You must stay in your lane. Every good leader knows their strengths and their weaknesses. Stay in your lane and make the biggest contribution you can.

  1. “Who’s not keeping up?”

Every organization has people who are ahead and behind. Nobody likes to be behind. However, when we fail to evaluate who is not keeping up we are discrediting the work of those who do. I’m not saying you have to automatically fire people who don’t keep up with you, but you do need to be aware and take appropriate action.

  1. What have we fallen in love with that is no longer…? What have we become emotionally attached to that no longer belongs? What is our way but is no longer the best way to…?

Just because the rotary phone used to be a good idea, doesn’t mean you have to keep using it today. Every system and ministry in your church was at one time a good idea. However, your church is not a history museum or an art museum. It is a living and breathing group of people. Just because something worked in the past doesn’t mean it works for today. Organizational leaders need to be rigorous in their evaluation of their systems, ministries, and models regardless of how in love they are or used to be.

  1. “What would a great leader do?”

I like this question because it allows leaders to step outside of themselves and to imagine and dream what somebody else might do. This process often frees mental roadblocks and allows a leader to think clearly and creatively about how to move forward.

For more from Andy Stanley, check out: www.insidenorthpoint.org.

Whose Mission Is It Anyway?
Whose Mission Is It Anyway? 900 598 The Provisum Group

‘The silver is mine and the gold is mine,’ declares the Lord Almighty. (Haggai 2:8)

Simple right?

But over the years I have talked with so many leaders in the church and I have noticed that financial stewardship in the church is never simple. Ask church leaders to tell you the words that pop into their heads when they think of church finances and you will hear words like: stress, conflict, meetings; and one of my personal favorite reactions, “Lord take me now.”

Intellectually, they have a plan; in their hearts, they have a mission. The friction usually resides in trying to do the right thing (the God centered thing) and the other right thing (the people pleasing thing) all at once. The church leaders can feel pulled in several financial directions. The desire to please everyone and serve all things well becomes overwhelming.

In my book, I shared a story about a church leader who needed a building torn down on the church property. He asked a congregate for a bid, the bid was high, yet he still felt obligated to use him because he did not want to offend him.

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I have no doubt that the pastor was on mission to serve the church. But there are detours that we can make in serving our mission and they can come in two common forms:

  • Aversions – Discomforts we try to avoid (usually internal fears or preferences)
  • Diversions – Distractions to our calling (usually applied by external sources)

Avoiding Detours Caused by Aversions

Our desire to avoid conflict and uncomfortable situations can be a driving force in how we spend the money of the church.

After all spiritual leaders are not matadors, waving a red cape anyone to charge at them. While spiritual leaders are faithful, brave, and not remotely faint of heart, they value harmony in the church.

The problem lies in knowing the difference between solving conflict and avoiding it all costs. While we may be tempted to avoid upsetting others or creating conflict, we have a better option of using our gifts to solve conflict that may arise (when we make God-centered decisions that others do not agree with).

To stay on course, and avoid the aversion-based decision making, ask yourself these questions:

  • Is any part of this decision based in fear of being uncomfortable or fear of conflict?
  • Am I trying to please someone with this decision or is this the very best decision for the church in the long term?

While we may succeed in avoiding the conflict by succumbing to our aversions, we may lose valuable time or finances in a decision that was not well suited for the church in the long-run.

Avoiding Detours Created by Diversions

While an aversion is caused when we get off course to avoid something negative or uncomfortable, a diversion is caused when we are pulled off course by a distraction or a tug towards something that is off mission but not necessarily wrong.

Diversions often come in the form of people who have a different mission in mind. While the spiritual leaders of the church are living a calling to serve God and grow the church, there are people who are on a different mission. Their mission may not be bad or unethical. But it might be a diversion to the mission of the church.

When we are not carefully focused on our calling, it can become possible for us to be pulled off course even by good and decent church-going people. The decision can be good in many ways, yet still be wrong for the church.

Here are a couple of questions to helps us unravel this diversion tangle:

  • Have I come to this decision after a careful time of prayer and reliance on Scripture?
  • Will this decision leave a legacy that clearly reflects my calling, or will it somehow reflect external pressure on my team or me?

Aversions and diversions are mission-negative. And they reflect the motives of the individual rather than the mission of the church and the true and godly calling of the leader.

Instead of fear and pressure bending the mission, allow your calling to keep your focus on the One who called you there to begin with.

After all, whose mission is it anyway?

Honor the Widow’s Mite
Honor the Widow’s Mite 300 171 The Provisum Group

 

Ministry leaders are responsible to do what Jesus did—to watch over ministry finances. Jesus watched people giving in the temple and commended a widow for the great sacrifice she had made. Though she gave only two coins (known as a “mite”), she gave all that she had. (See Mark 12:41–44; Luke 21:1–4.) In the same way, we have to honor the level of sacrifice that people make to support the spread of the gospel and the life of the church.

A litmus test I use to determine the righteousness of a choice I am considering is to ask myself one central question: would I be willing to do or say whatever I am contemplating in front of my entire church congregation?

If I would not want my thoughts or my decision put up on the big screen for all to see, it is probably not righteous.

If you’re weighing a decision that relates to money, just imagine telling your entire congregation how you spent it. If you would be comfortable doing so, then it’s probably a right and a righteous thing. We have to trust the Holy Spirit to give us discernment in this area.

The sacrifice of the widow shows us the importance of spending money wisely.

If You Build It, They Will Come… Maybe…
If You Build It, They Will Come… Maybe… 300 151 The Provisum Group

 

The common error of thought in many churches is, If we build it, they will come. Whether it’s a new website, a new pastoral hire, or a new strategy, churches sometimes feel that if they simply do something new they will reap the rewards.

The truth is that before you decide on what you are going to do, spend some time considering how you are going to do it and how you are going to keep it going. Furthermore, you should work hard to avoid top-down prescriptive solutions.

Here are a few evaluation questions for making strategic decisions.

  • Why do we want to make this change?
  • What empirical evidence do we have to support this change?
  • How are we going to make this change?
  • How are we going to keep it going?
  • Have we taken time to listen to the community?
  • How will we know if we are successful (What are the metrics).
  • When will we stop if we are not successful?

By learning as much as you can and seeking data from the church community, you are more likely to avoid costly strategic errors.

Principles for Minding His Business
Principles for Minding His Business 208 300 The Provisum Group

Minding His Business Principle 1
The greatest cost most churches will incur is “opportunity cost” — the price of doing the safe, easy thing — or, even worse, doing nothing—instead of the “scary,” God thing.

Minding His Business Principle 2
People making business decisions that impact the church or congregation need to know what they’re doing. Hire people with proven track records and solid reputations to conduct the business of the church.

Minding His Business Principle 3
Before you decide on what you are going to do, spend some time considering how you are going to do it and how you will keep it going.

Minding His Business Principle 4
Turning business decisions into matters of personal preference causes progress to grind to a halt. It is better to reach many outside your church and risk upsetting a few inside your church than to reach only a few and upset no one.