Nonprofit Resources
Margin for Mission Podcast S1:E3 – It Depends! – Transcript
Ken Tan:
Welcome to Margin for Mission, the CRI CapinCrouse podcast, where two friends, Ken and Chris, bring you real talk about creating space for what matters most. Because when your organization has financial and operational margin, you can focus on your mission with confidence.
Chris Purnell:
We’re professionals who’ve spent years helping churches, higher education institutions, and other mission-focused nonprofit organizations manage their accounting, tax, compliance, and other challenges. We understand the complexities you face, and we’re here to make it simpler.
Ken Tan:
In each episode, we’ll dive into practical insights on leadership, operations, and the everyday challenges of running a nonprofit without the jargon.
Chris Purnell:
And we’ll talk about life too. Family, faith, quite a bit of football, and finding balance in a world that rarely slows down.
Ken Tan:
So whether you’re managing budgets, leading teams, or just trying to keep your mission moving forward, you’re in the right place.
Chris Purnell:
This is Margin for Mission. Let’s get started.
Ken Tan:
Well, Chris, here we are, another great time for us just to get to connect again. How are you doing over there, sir?
Chris Purnell:
It’s been a journey. It’s been a journey, Ken. So I caught the flu just like the 100 million-
Ken Tan:
Half the country.
Chris Purnell:
Yeah. We should have just taken the first week of January off. It was an absolute mess. I like to say that it was like toddler temperatures. I was seeing numbers on that thermometer that I haven’t seen since I was a wee lad. So it was touch and go. But you know what the funny thing is? So I got it and I was out of commission for like four days. I’m thinking about updating my will. Got to make sure that our kids are well taken care of. And then Christie, my wife, she just got it. And literally the lady was out for like four hours and then she’s back up and at ’em and taking care of business. So I don’t know what that means. I think I just got the significantly worse version because surely I am not that significantly weaker than she is. Surely not.
Ken Tan:
Absolutely not. But you know there’s always that stigma we get as guys whenever we get sick that we’re just always out for the count and completely useless.
Chris Purnell:
That’s right.
Ken Tan:
So grateful to have some amazing ladies like that that are able just to muster through it.
Chris Purnell:
Amen. Amen.
Ken Tan:
Well, I know even as I even think about just some of the uniqueness of getting into the new year … We talked about it even with the big why about fresh starts, all these types of things. And I feel like for me … I know we’ll talk about where I’m at this time around. But I need to have a confession related to this episode, Chris.
Chris Purnell:
Safe place.
Ken Tan:
Yeah. I hope it is. I really hope so. Because if not, I guess we’ll have a new speaker for the next podcast with you, Chris.
Chris Purnell:
It’s too raw.
Ken Tan:
It’s my time just to open up a little bit. And so part of this is, as you know, I’m a CPA and a lot of times there’s a misconception about being a CPA. And I’ll admit that for the first couple of years when I got my CPA, I was deep into public accounting as an auditor and everyone would be like, “Oh, how are you doing?” I’m like, “Oh, it’s just been so busy.” And they’d be like, “Oh, I can only imagine.” And before I can explain, they’d be like, “Because of taxes right?” And I’d be like, “Well, I’m actually not a tax CPA. What I do is I do audits and then they’re asking, well, what’s an audit?” I’m going off about, “Oh, well, I do the substantive testing. I do test controls.” And 30 minutes into it, I realized that by minute two they’ve already glossed over. You had that look like, “Oh, okay. They didn’t understand it.” And I kept doing this where I just kept to an extent playfully or at least nicely admitting … I was like, “Hey, I’m actually an auditor.”
Well, probably by the fifth year going into this of people saying, “Oh, you must be busy because of taxes,” I finally just broke and I said, “Yes, yes, because of taxes.” And so I just want to really get the elephant out the room that I am a CPA, but I am not a tax CPA. But the thing is, a lot of folks think that because you’re a CPA, you probably do taxes.
Chris Purnell:
Automatically.
Ken Tan:
Automatically, right.
Chris Purnell:
Yeah. Well, to the extent that I can provide absolution, Ken, you are absolved.
Ken Tan:
Thank you.
Chris Purnell:
And set free from any guilt or shame that you’ve been carrying around.
Ken Tan:
My wife is the tax CPA. You do not want me to be your tax CPA. So that’s how I want to say it there. And we’ve been going on with this type of thing about where’s Ken this year … Well, this year, right? Where’s Ken this time around? And Chris, it’s been pretty fun. I am in a different place. And so my hope is to give you a couple of, let’s say, hints about which city I’m at.
Chris Purnell:
It’s a great game.
Ken Tan:
Let me know when you’re ready. Are you ready?
Chris Purnell:
Okay. I’m bracing myself. Yeah. Let’s get the juices flowing.
Ken Tan:
All right. So here’s a couple of things about this particular city. So it is known as Rocket City. It is a high-tech hub that is tied to NASA and it is also considered as the first incorporated town in this state where the first constitution was drafted. They have a minor league baseball team called the Trash Pandas. And it’s one of those things … You start to hear some of those things … The hotel I was staying at was actually near the Trash Panda stadium. And I was like, “Ah, that’s pretty cool.” I never thought about another term for what a raccoon was. It is in an area that could be heatly contested in terms of the fan bases of either a war eagle or a roll tide. And so I’m not either one of those, just because as you know, I am a Georgia Tech fan and Indiana is a football team again, so we just need to emphasize that. So where do you think I went, Chris?
Chris Purnell:
Man. Man. There’s some really good hints there. It’s almost like too many. I’m thinking about like Rocket City, that’s a really big one, roll tide. So it’s the football team formerly known as the Alabama Crimson Tide before we met. The Hoosiers.
Ken Tan:
And then we lost half of our subscribers now, Chris but continue.
Chris Purnell:
Hey, it’s not their fault they ran into the bus saw and known as the Curt Cignetti effect. And in Alabama … Well, so this is a small world thing, but I actually have some family that is in Rocket City and that now lives there. In fact, my brother and his family are in there. It is just across the border into Huntsville, Alabama.
Ken Tan:
Boom. You nailed it right on the head. It was a pretty little town.
Chris Purnell:
It is a pretty little town. Are you taking the boys to space camp?
Ken Tan:
Oh, we will soon. I know because we have matching space suits, courtesy of my sister-in-laws, because they all work for different space programs. And so that shows they want to be the favorite aunt. And as a part of it, they have been buying some of those space suits for the boys to wear, and it’s completely cute. And then I’m just like, “You know what? Let’s just continue to let them enjoy this.” And if they get to go to space camp, they get to go to space camp. And luckily it’s only three hours from Atlanta.
Chris Purnell:
That’s not bad, man.
Ken Tan:
It was a fun time I had there in Huntsville.
Chris Purnell:
Are you guys just there for family vacation/a little bit of work or what’s cracking?
Ken Tan:
It was a mix of both. Had to get some meetings done, but then of course, just trying to spend some of that family time. I know we touched on work-life balance or it’ll be for an upcoming episode about work-life balance. And we really want to make sure that works. Especially since our boys … Brittany homeschools and so it’s a fun thing for us just for them to be able to tag along when we can let that happen.
Chris Purnell:
Man, that’s really cool. That’s really cool.
Ken Tan:
Well, I have another exciting thing to share too, Chris. I think we have our first sponsorship and it’s in line with the episode. It’s called It Depends, sponsored by Depends. I’m just really kidding. But if Depends is listening, we will gladly … Chris will gladly market for us.
Chris Purnell:
That’s right. I’ll sport the depends. That’s right. True story here, Ken. So one of my childhood idols growing up was Dion Sanders. Coach Prime of the Colorado Buffalo, and he is now sponsored by Depends because … And this is a sad part. He had a surgery for bladder cancer, and so he had some incontinence issues, as they say in the biz. And so he was rocking the Depends and he was trying to destigmatize incontinence issues and so Depends was sponsoring Coach Prime. So there you go.
Ken Tan:
Hey, it’s part of it. There’s a reason why they’re in business and it’s not at all meant to shame, right?
Chris Purnell:
That’s right.
Ken Tan:
It’s saying that there’s something where we want to make sure we can help honor, especially folks as we get older and all that. There’s something like that, a product.
Chris Purnell:
Amen, brother.
Ken Tan:
But as we continue, I think that the topic, even the title, I think really is relevant for us because as both a CPA and a lawyer, there’s a lot of times people are asking us questions, especially in the ministry world about, “Oh, how about this scenario? How about this scenario?” And it’s not really a yes or no. It actually ends up being, well, it depends. And so that’s where I’m so excited that you get to be the one that talks a lot about this. And let me just preface a lot of folks that with how Chris presents at a lot of our conferences and presentations, people have come up to me and said, “Man, Chris makes taxes interesting.” And I’m like, “You know what? That in itself is a whole level of just raising the bar because who needs melatonin when you talk about taxes?” And so that’s where part of it is, Chris, you get to make it interesting. And so love to hear some of the things that you’ve thought about just from the tax side, because that’s what you do day in and day out. And I think for the folks listening, I think they’d love to hear a little bit more about what Chris does to make it so interesting.
Chris Purnell:
Yeah. Yeah. Well, that is high praise to hear that people think that tax is interesting. And I don’t think it’s anything that I in particular do, but I think that I bring a level of interest to the table. I am genuinely interested in the world of tax and as it relates to ministries more particularly. I think also too … And we talked about this during the Big Why episode, given my background in the nonprofit world and living and eating and breathing that air and just understanding how complex and nuance and weird it can get, I think just having that in the background too helps. But yeah. I am a lawyer, but I’m a lawyer at a CPA firm that does tax consulting work. And so this is stuff that I interact with on a daily basis. And I figured that maybe a good place to start would be to say, “Hey, it’s January, it’s a brand new year. We’re thinking about what has gone by, we’re thinking about the future. What is 2026 going to look like?” And are there any year-end tax related things/things in early 2026 that we should just be aware of and have on our radar? And the answer is yes. The answer’s yeah, you really should.
The good news is that if you’re a ministry, you don’t have a tax return filing obligation usually. Sometimes you might have what’s called a 990T if you have unrelated business taxable income, which we can talk about that. What does it look like to operate an unrelated business and what are some of the more normal run-of-the-mill unrelated businesses that we’ve seen/what are some of the more exotic things that we’ve seen out there in the wild? But also like payroll tax reporting. So making sure that your 1099s are sent to the recipient at the right time and with the right amounts and the W2, same thing.
We do have some ministries that do file a standard issue run-of-the-mill 990. So not a 990T, but a 990. Just an annual information return. Not traditional for most religious organizations, but we got a lot of folks that still decide that they want to want to file that. And I suppose that maybe now is a good time to talk about … Okay. We’ve talked about 1099s really quickly, W2s really quickly. What determines whether a person should receive a 1099 or a W2? And so Ken you work with churches all the time and I’m sure that this question comes up. How do I determine whether someone’s an independent contractor or an employee?
Ken Tan:
Oh yeah. And there comes that question, the answer usually is it depends, right?
Chris Purnell:
It depends.
Ken Tan:
And you start to talk about it even more. And they always want to have a quick yes or no until you’re just like, “Well, you may not like the answer, but I need to explain why.” And that’s where you start to see that piece too. And that ends up being a very, very prevalent question that keeps coming, what’s a 1099 person versus a person that could be a W2?
Chris Purnell:
Yeah. And the hard part here is that the IRS is not quick with coming forward with bright line rules like, “Hey, if you pay a person two times over the course of the year, then that means they’re going to be a W2 as opposed to a 1099.” But that hasn’t stopped churches from trying to create some kind of bright line rule. I’ve got one church, very prominent church, very big church, sophisticated church, lots of solid professionals and management. And they just got to the point where they were like, “Listen, we can’t go through the nuanced analysis of what kind of worker this is every single time.” So if we pay you three times for things, you’re officially an employee. Congratulations and you’re going to get a W2.
Now there’s nothing particularly wrong with that. It’s a little bit to the side of how the IRS likes to do this. Back in the day, it used to be that the document that you would give to an organization to tease out whether a person was an independent contractor or an employee was a form SS4, the form SS4. And this is the document that an employee or an independent contractor would send into the IRS to have the IRS determine if they were an employee. The thing’s got like 22 factors on it for determining whether someone’s an independent contractor or an employee. It’s bananas.
Ken Tan:
Oh, yeah.
Chris Purnell:
And so you’d have like employers going through this and saying, “All right. Well I exercise a little bit of control over their work.” They don’t get benefits, they don’t get time off, but I do have them-
Ken Tan:
You have a space for them.
Chris Purnell:
Church issued laptop. Yeah. That’s right. I got space for them. There’s a little bit of training all the way down the line. And then you might have like 10 on one side as an independent contractor and 10 on the other as an employee and then you’re just back where you started. I don’t send people to that anymore thanks be to God. What I do instead is the IRS has IRS Publication 15A. IRS Publication 15A has a really solid discussion about whether a person is more faithfully classified as an independent contractor versus an employee. And it’s in English, it’s aAsmazing. And it’s not long, it’s not tortuous. You don’t feel like you’re getting all lost and twisted up in the verbiage. It’s pretty clear and concise, but it boils down to a few big ticket items. Number one, do you exercise some kind of behavioral control over the activities of that independent contractor/employee over the worker? That’s the general-
Ken Tan:
Yeah.
Chris Purnell:
And so are you telling them when to show up? Are you telling them how long they need to show up? Are you telling them, “Hey, here’s how you do the job.” Are you giving them training on that job and that stuff? And then number two, are you giving them benefits that are commensurate with an employee such as health benefits, PTO, flex time off, sick time, the normal things that you would normally associate with an employee relationship? And then last but not least, one of the things that came up in our research doing this was the IRS really likes to see whether there’s a risk of loss. So if you’re a person who runs your own business and you actually bear a little bit of risk of loss, then that is going to push you more into be considered an independent contractor as opposed to an employee. And it turns out that’s a really big deal to the IRS. Do you bear a risk of loss? Do you bear some kind of substantial benefit or detriment depending on how things go for you? So that’s another big one that’s out there in the mix and is really helpful.
Ken Tan:
You bring up some of these points that to an extent, a lot of times you start thinking about a lot of churches like to go the 1099 route because it is easy. You’re not having to withhold. You just essentially send that report and they handle it later. But as you start peeling the onion per se, you start realizing there’s actually a level of control and a lot of things that ultimately it may be the safer route of going the W2 route because of just the fact that, at least in that case, you’re handling the taxes piece and all. Sure. It may be an extra couple of steps, but it helps keep things a little bit straightforward and clearer for me versus just saying, “Well, it’s going to be a big climb to really make sure you can show that everything here reflects that this is a 1099 contractor.”
I think it’s always going to be a prevailing question every time because again, this is where you start thinking about the uniqueness of the church too. And with it comes also leadership that has a fairly more visionary mindset as opposed to the administrator, which is completely fine. That’s why there’s that healthy tension between the senior pastor and even an executive pastor and their operations team of, okay, here’s what we see, but how do we make sure that we keep things not just compliant, but just help prevent any potential risk for us as an organization while we continue to further as kingdom?
Chris Purnell:
That’s right. That’s right. Yeah. Trying to be above reproach, trying to make sure that you’re doing things in a compliant manner is huge. But you’re right. Sometimes senior pastors/youth pastors, they’re just not really in that head space. And so having an ex pastor or an administrator who can communicate well with those types is super important. Yeah.
One of the things you said kind of made me think through what are the most common scenarios where I see the worker classification thing pop up and the two big ones … And maybe you’ve got others. But the two big ones where I see it are number one, childcare workers. So these are the people in your nurseries and that sort of thing. And then number two, worship band gig workers.
Ken Tan:
Yeah. The musicians.
Chris Purnell:
Yeah. Yeah. I don’t know if you see it in other spaces and churches and nonprofits more generally, but those are usually the two that are the repeat offenders.
Ken Tan:
Oh, I completely agree with you. I think a lot of it usually goes into that worship leader or the musician is saying like, “Well, they only come in on Sundays and then they come in, they do their practice, they have their own guitar, they have their own equipment, and then they leave.” And you’re like, “Well, I think I can see that.” And then of course the childcare employees. Well, let’s say whether employees or contractors, there’s a lot of that section there where you start thinking about, “Well, it may not be clear cut yes or no, but let’s walk through it to see which makes the most sense.” I think this is why this podcast is so relevant for us whenever we talk about this, because there are uniqueness to a ministry as well.
Chris Purnell:
That’s right.
Ken Tan:
With it comes unique questions too. And I think one of the things that we’ll probably talk about are some of the unique questions we have probably seen in this area. It’s not meant to shame. It’s not meant to make fun of anything, but just saying, look we get it. We get there’s probably some things here that you just want to ask what makes sense from a tax perspective. And we’ll talk about some of those examples too later as well.
Chris Purnell:
Kim, we’ve got some creative people in our churches and ministries who sometimes try creative things. Thanks be to God.
Ken Tan:
And thankfully that’s not us because as accountants and tax … At least accountants and lawyers, I’ve always said, “We keep creativity out of this because accountants, when you get creative, you go to jail.” It’s so much more fun being outside. So I always like to stay that route.
Chris Purnell:
Yeah. It’s really sad, but the law school that I went to, the atrium area was named after a lawyer who got a little too creative and the atrium had to keep his name after he had been disbarred and all that stuff. Now I think they’ve changed the name of the atrium since then because they’re like, “Hey, we can’t keep doing this.” But yeah, same for lawyers. We can’t get too creative or else we’re going to get in hot water.
Ken Tan:
And that’s where I think part of it’s like, this conversation, ends up being pretty much a recurring topic is the tax piece because part of it is essentially saying, “Look, we want to make sure you can properly document it. We want to make sure you can help justify something if it is a consideration so that you could sleep well at night.” And that’s where part of it is the case here is, again, not trying to be the hindrance, but we do want to help navigate and make sure things are being done well. So you don’t have to worry about saying, “Okay. Is someone or an organization going to knock on my doors and question this,” when we have actually vetted it, we’ve walked through it and talked through it, and this is why we believe that this stance makes sense.
Chris Purnell:
Yeah. Yeah. So another year-end, beginning of year sort of question is, “Well, what about contribution receipts?” People are of two different minds when it comes to contribution receipts. There are some that say, “Hey, anytime a person gives us a contribution of any size, they’re going to get some kind of contribution receipt, whether it’s an email that’s auto-generated or an actual letter that comes from the ministry to the person saying, ‘Hey, here’s the date of your contribution, the amount of the contribution, et cetera.'” So that’s one option. Another option is they just keep a running tally of all the contributions that are made by that person over the course of the year and then sometime in January, they give that person the contribution receipt for their tax. And then there’s some that do both, like what we call on the biz, a belt and suspenders approach. It’s like, “Hey, we’re not going to do either or we’re going to do both.” I think there’s something to commend to all of those approaches, but the one that you have to have to have to have to have is if you have contributions of $250 or more as a donor, you must have what’s called a contemporaneous written acknowledgement of that contribution in order for you to claim that as a potentially tax-deductible gift on your income tax returns. That’s like the bare minimum, that’s the absolute rule.
And the contemporaneous, you have to get it before you file your taxes. So it’s got to be in your records, it’s got to be in hand from the charity before you actually go to file your taxes. So that’s why you usually see those come out in January because a person’s not going to file … I’m going to file mine April 14th, so a little bit early this year.
Ken Tan:
Look at you, Chris, just absolutely studious.
Chris Purnell:
Bright and early. So it’s making sure that it’s done before the donor actually goes to file their tax returns is the rule here.
Ken Tan:
Well, I think the phrase I learned back in my auditing days still applies here about if it’s not documented, it’s not done. And that’s where part of saying you want to have the documentation, you want to have it retained. I will say … And you start even thinking about the contributions and even just the reporting piece, I think maybe Chris, you might agree with me with this, but even from the ministry side, whether it’s a church or a mission organization, it will probably be good for you to make sure you have some type of gift acceptance policy because even in some of those instances … Again, I love the charitable giving because you start thinking about it comes from the sacrificial heart of most folks. And I say most because there are some unique gifts that we have seen and this where part of us as an organization, sometimes you’re willing to say yes.
Probably one of the most unique gifts that I’ve ever seen a nonprofit ever receive was a mobile home park and actually an occupied mobile home park. And before they could … The CFO I was talking to had just joined when he found out about, oh, this organization accepted a mobile home park as a gift. Now they have to deal with, okay, how do you handle the tenants because it was actually a mobile home park in another state. So it became a lot more complicated than just recording the value of the property. So that’s where I was just saying, look, it’ll be great because I’m sure it’s a great property as well eventually, but I think organizations need to be mindful of what they’re willing to accept, don’t you think, Chris?
Chris Purnell:
I absolutely agree. A gift acceptance policy is really, really key, both for internal people who are accepting gifts … Because you’re right, you want to say yes, it’s a “free gift”. How could you say no? But at the same time, if it’s going to come with those kinds of strings attached and you’re going to have to manage the property and/or figure out how to dispose of it in some way, then yeah, it may be more trouble than it’s worth for sure. For sure. And maybe it’s a gift that is coming from someone that you’re like, “Man, I don’t really know if we want to be associated with this particular person or this particular company.” That does happen. Although I will say this, I used to be a fundraiser back in the day and I was in a fundraising training with a dear sweet nun and she goes, “I could take money from the hand of Satan himself and I would apply it to the Lord’s work.” And I was like, “Well, hey.” So there’s definitely different philosophies on accepting gifts from particular people and particular organizations for sure. For sure. But yeah, having that gift acceptance policy in place, both for your internal people, but also for your external facing folks so that they know what you’ll accept, what your process is, what you’re more liable to say no to and that sort of thing is really key.
Ken Tan:
Sure. And even the communication of the gift itself, because I think there’s a lot of times … You and I have seen it, of course, again, this is where you’ve seen it from the fundraising side. If you have a donor that has a heart to give towards a particular area, that’s perfectly fine, but there are times where it could be absolutely restrictive that it actually becomes more of a burden. And that actually has been some of the things I had even seen, even my own controller days at my previous organization where we were trying to figure out, why do we have this fund since substantial, even before I was born, that is towards the repairs of organs. Not the organs in your body, but the actual playing organs. And you’re like, “Well, we don’t have any organs in our office building, so we’ll try our best to donate it to a church that does need it within the denomination.”
And so that’s where you start to just see some of these things of saying, “Let’s see if it also makes sense from the gift side of what’s being there because sure, we’d love to open up all these … Whether it’s benevolence funds and memorial funds and certain things for particular purposes, but there’s a lot of times that if it becomes so restrictive, it actually becomes more of a burden because you’re having it to be tied so particularly for this one thing too as well.”
Chris Purnell:
Yeah. Well, let’s use this opportunity to talk about something you just mentioned offhand, but I think it’s really relevant, especially in the church space, and that is benevolence gifts. Benevolence gifts. So there’s all kinds of questions that surround benevolence gifts, but for those who may be aware about what benevolence is, but maybe just need a little bit more of a refresher, a benevolence gift is a gift made to those who are needy or distressed, that’s language that the IRS uses, so forgive me. But needy and or distressed. And that can be a case of temporary need. Maybe there’s a temporary job loss or something like that. Or it could be more chronic where maybe a person has some disability and they’re just not able to work or whatever the case may be.
Those gifts made from the church to that person are not considered taxable income to that person. So that’s an important first step to note. And that comes from … I’m going to say an internal revenue code section, so watch out.
Ken Tan:
Hey, I’m going to cover my ears now.
Chris Purnell:
Internal revenue code section 102. 102 talks about gifts made to people and says that those are considered non-taxable. But then you shift to the side and you say, “Well, is there ever a situation when there might need to be some kind of tax reporting due to a benevolence gift?” And this is where I’m going to mention our sponsor, actually not a sponsor, but kind of a sponsor, could be a sponsor.
Ken Tan:
Could be. Hey, again, we’re willing to accept that.
Chris Purnell:
That’s right.
Ken Tan:
We’ll make sure it’s properly organized and represented.
Chris Purnell:
That’s right. It depends. It depends. If you as a church … Maybe you have a policy that, hey, we try not to give benevolence contributions directly to benevolence recipients. We’d rather send the check to, let’s say, the light company or maybe give them food itself or maybe if it’s rent, we want to pay the landlord themselves as opposed to giving that cash to that person. Totally get that. That’s just part of your policy. There may be a situation where you need to provide that landlord with a 1099 because maybe they’re not a corporation, maybe it’s just an individual. Well, they’re getting funds in the course of their business, which is operating as a landlord. So therefore they need a 1099. So sometimes churches will ask that question like, “Hey, do I need to provide a 1099?” And what I always tell them is for the recipient, no. If you’re sending cash to third parties to make payments on behalf of the recipient, the answer is it depends.
Ken Tan:
It depends.
Chris Purnell:
So maybe get a W9 to make sure that, “Hey, I don’t really have a 1099 obligation here, but it’s something to really consider.”
Ken Tan:
Sure.
Chris Purnell:
And then one last issue that I just want to throw out there is, can employees receive benevolence?
Ken Tan:
Good question.
Chris Purnell:
Yeah. Yeah. The short answer is they can. They can. If you’ve got an employee who is in really hard, let’s say medical straits or there’s another financial issue that just popped up or their car broke down or whatever it is, you could give them something from benevolence. You really could, but you have to include it in their taxable income. And that’s because of code section 102C. Code section 102C, that’s in the same big section that deals with non-taxable gifts to individuals more generally. But then you go down a couple steps to 102C and 102C says, “Hey, this doesn’t apply to employers and employees.” Because it just shuts the door on non-taxable gifts from employers to their employees. So something really important to consider there. Yes, you can, but just know that it’s got to be included in the taxable income.
Ken Tan:
Yeah. I think that employee question keeps coming up a lot of times, even in ministries too, because that’s where part of it’s essentially saying, “Look, we see where the hurt is and we want to make sure we can help, but at the same time, we want to stay above reproach.” And that’s where part of this is, as you can tell, a lot of our questions aren’t a simple yes or no. It’s a, let’s just make sure we understand the circumstances because it could depend. And then part of it is how do we make sure we go the right process to stay above approach too as well?
Chris Purnell:
Yeah. Yeah. No, it’s good. That’s really good. There was one more thing that I thought about in the context of year-end, year beginning, and we can move on to some other aspects of the wonderful world of tax. And that is minister’s housing allowance designations.
Ken Tan:
A fun one.
Chris Purnell:
That’s right. That’s right. Ken, it never ceases to amaze me. The wonders never cease. A church can be really sharp in a lot of different areas. And again, this is no slam, it’s no shame. But for some reason there can still be like a nub of misunderstanding regarding how to do the minister’s housing allowance in various ways. What should a W2 look like? What should payroll look like? How do you designate the housing allowance? The reason why I think it’s important to think about it year-end, year beginning, is because the housing allowance amount must be designated in advance of payment. For those of you who aren’t aware about how ministers are special, unique unicorns in the world of payroll, they occupy what’s called a dual tax status. They receive a W2 like just a normal employee, but they are anything but a normal employee.
They’re subject to what’s called the SECA tax regime as opposed to FICA. And so their W2s are going to look goofy if you’re looking for the normal employee stuff. But the big benefit is that they can receive what’s called a housing allowance amount from their employer. And the designation must be made in advance of payment. So sometimes the way this can go awry is let’s say a church brings on a new minister and then forgets to make the designation in December and then they move forward in January, February, March, and then March rolls around and then someone picks up on the fact that, “Hey, this minister, they’re entitled to the housing allowance, but they’re not actually getting it.” And here’s the big benefit of the housing allowance. The housing allowance amount is excluded from gross income tax though it is subject to the SECA tax. And so this person, they say, “Well, can we just go back and designate for January, February, and March because we just missed it.” And I have to be the bearer of bad news, which Ken, as you can tell, that’s not really something that I really super enjoy.
Ken Tan:
It’s not fun, right? Really not fun. Does not spark joy.
Chris Purnell:
It’s really not fun. Does not spark joy, that’s right. And so you have to say, “Well, unfortunately you can’t. You can’t. You can only designate in advance of payment.” And so it’s only for qualified housing expenses after the designation happens. And so only from March going forward can you designate a housing allowance amount. So that’s really important to keep in mind. You should probably have some kind of process in place that every December you’ve got your ministers, they’ve turned in their ministerial housing allowance worksheets, you’ve walked through those and you have some kind of process for either the board or the elders or the deacons or whatever your policy structure looks like to go ahead and make that designation and then you can move forward in confidence knowing that you’re covering those housing expenses.
Ken Tan:
Yeah. You brought up another thought here that some of the questions … And I’d love to get your thoughts on this too. Is that sometimes the church will ask, “Well, what if the pastor is provided a parsonage versus renting, versus them buying a house?” What are some considerations there if there is a parsonage available as opposed to the pastors has to find a place to rent or to buy?
Chris Purnell:
Yeah. Yeah. A parsonage used to be the main way that a church would provide housing to its minister. Those are going to the wayside.
Ken Tan:
Not as common nowadays, right. They’re not as common though. I want to preface that. But we’ve seen a couple just pop up.
Chris Purnell:
In fact, like my church, we have a parsonage and our youth pastor lives there. And it’s actually a really great relationship for both of us because we have a house that’s now occupied by the minister and his family. He doesn’t have to really worry about that. It’s taken care of by the church and that stuff. Now there’s some downsides to that. He’s not building equity in a piece of property, which is a bummer. It is definitely a consideration for ministers as they get older, trying to make sure that they have access to real estate equity and that sort of thing. But by and large, it’s good.
Now, what are the considerations here? The first one is that you have to figure out what’s the fair rental value of that parsonage because the fair rental value of the parsonage will then be included for the purposes of the SECA tax, still not subject to the income tax because again, it’s the parsonage. So it’s just like the housing allowance in that way. Subject to the SECA tax. And on top of that, if the minister has any expenditures that they make on their own, then that can be designated as a housing allowance. So for instance, let’s say that he’s living in the parsonage and you decide that the fair rental value of that per month is a thousand bucks per month. Well, then you’ve got $12,000 in parsonage that’s going to be in SECA tax territory, not gross income tax, but SECA tax.
But then they pay utilities, they pay internet, they pay for cleaning supplies, all that good stuff. And they say, “Well, I think it’s going to be another 500 bucks a month.” Well, then you can designate 500 bucks a month as housing allowance from their traditional compensation, reducing their traditional compensation and throw that amount in the SECA tax bucket and not subject to gross income tax. So you can double stack things a little bit that way to cover both the expenditures and the parsonage fair rental value.
Ken Tan:
Well, you start to thinking about even just the ministerial tax situation itself, you think about the housing allowance and all that is a big conversation that comes up with a lot of churches regardless of the size. Another one … And Chris, you may be already jumping into this one, but this was one that even my father had a lot of conversations with his fellow pastors before was that pastors technically have the ability to abstain from taxes and from paying taxes as well. It’s a hot button issue and a hot button topic in general because that is a consideration because that’s their own considerations that they can do here. But there are ramifications because it is essentially, if you’re deciding not to go that route, here’s what happens as opposed to continuing. And Chris, I don’t know if you want to share a little bit about that. And some of the pastors have asked that question before.
Chris Purnell:
Oh man.
Ken Tan:
We’re not giving advice. There’s the preface. But this is just saying, this is some of the things that we see a lot of ministers asking these questions, a lot of churches too, especially because that talks about the future and planning and retirement.
Chris Purnell:
So a little bit of history here. It used to be back in the day … Back before I was like even a gleam in my father’s eye, and this is how far back we’re going, and I’m not a young man. The advice to jour was that ministers should go ahead and apply for exemption from social security and Medicare tax. That’s another 15.3% tax. That’s the SECA tax. And the idea was that, hey, you could just take some of that cash that you’re saving and chunk it into some kind of retirement vehicle so that way you can take control of your own retirement destiny. Well, we’ll talk about the claiming exemption and what’s required for that and the pitfalls that you were alluding to earlier. But leaving that to the side for a second, how often do you think it was that the ministers just thought to themselves, “You know what? I’ve got this extra 15.3%.”
Ken Tan:
Pretty nice.
Chris Purnell:
Yeah. And, “Oh yeah, retirement. Oh, I forgot to open up that IRA 30 years ago.” Happened all the time. And so ministers, they’d get to near the end of their time of service and they would realize that they didn’t really have sometimes anything in retirement savings. Sometimes they just have a little bit. And so they would think to themselves, “Holy smokes, well, what can I do? Is there a way for me to put the toothpaste back in the bottle? Can I flip a switch somewhere and just say, Hey, just kidding, I really do want to be subject to the social security tax, so that way I can get the 40 quarters, so that way I can get social security when I’m … Time to retire. And the answer is, once you claim exemption, it is really hard to jump back into the non-exempt space. You essentially have to change jobs and do a non-ministerial job and just get a regular gig.
Now, let’s get back to that claiming exemption. When you claim exemption, you file the form 4361 and on the 4361, you’re telling the IRS, “I have essentially a conscientious objection to social security and Medicare.” That’s a really high, high, high, high burden.
Ken Tan:
It is. Yep.
Chris Purnell:
So if you’re going to say that, you really want to think about it and be deliberate about it. Now, Congress has, over the course of its time, created short term bubbles where they’ll say, “Hey, for those of you who claimed exemption, we’re going to allow you to opt back in to the social security system.” Usually it’s for a period of two years or so where they’ll allow for that opt-in. There is a bill that’s just passed the house committee, I think, sometime in the last few months called the Clergy Act. And the Clergy Act’s like a legislative buoy. It just pops back up and down every year or so. Who knows whether they’ll be able to make any hay with it this time around, but it’s essentially another one of those moments where there could be an opportunity to opt back in the social security. Because yeah, if you are a minister who’s worked for decades and you don’t have those 40 quarters in order to get social security, it is tough. It is tough.
Ken Tan:
And I’ll say, even just seeing it from … If I put on my church denomination leader hat, I’ve seen a lot of denominations really advise against filing that 4361 because of the fact that they’ve started to see a lot of those ones back in the ’90s that did do this. Now they’re reaching that retirement age and they didn’t save for anything. And now there’s a lot of things about pastoral hardship and all that are saying, look, we have to really be mindful about being a good steward of the fact that sure, you didn’t have to pay that 15%, but here’s the consequences now. It’s for you to decide. We’re not here to say yes or no, but here are some of the ramifications. Are you prepared to handle that knowing that in the blink of an eye, 30 years can come very quickly and here we are. Are we ready? Are we prepared to be able to retire in grace or not?
Chris Purnell:
Yeah. Yeah. Amen. Amen. And then it leads to these interesting situations where I had one pastor who reached out to us, just a dear sweet man of God, faithful servant. And basically he was trying to figure out, can I like become a janitor at my church. Like not serve as minister anymore, not do pulpit supply anymore and that sort of thing in order to just get some of those 40 quarters. And yeah, so it’s tough. Think very critically about whether you want to do that before you actually just jump into it, for sure.
Ken Tan:
Sure. I think about that. It’s interesting. We think about, it’s a spectrum of what we see because we have folks that talk about not being prepared for retirement, but then you also have the other side where it could potentially be overly generous. And I’m not trying to be at all judgmental, but this is part of this. You and I, we interact with hundreds, if not as a firm, thousands of churches. And because of that, we see so many different scenarios from the small 150 member church to a multi-campus, multi-location, 30,000 member church. And with it comes a consideration of what is reasonable compensation, right? Is this considered excessive for our pastor? Could they get a Cadillac and also thing that’s being … Not saying that’s an example we’ve seen, but that’s where some of the things are just saying, look, there’s so many different nuances, right, Chris? And that’s where I’d love to get your thoughts, because I know our firm does a lot of these executive comp studies, and it ultimately ends up being the case of, okay, what is the right balance? It’s always about balance. But would love to get some of the thoughts that you see in that case too, because that does have a tax implication too as well, doesn’t it?
Chris Purnell:
That’s right. That’s right. So maybe a little bit of the broader tax context here would be helpful. So one of the things that a tax-exempt organization, which a church is a species of a tax-exempt organization, is that they cannot engage in, number one, private inurement. There’s an absolute prohibition on private inurement. That’s where you have insiders or “disqualified persons”, people who exercise substantial influence over the organization, benefiting from that relationship. Big no-no. Full stop. Don’t do it. And you shouldn’t have what’s called private benefit. Now, private benefit is kind of downstream from private inurement. There’s not an absolute bar on private benefit because come on, you’re going to have people that are related to the organization that get access to the organization’s benefits. A really clear case is maybe a board member of the YMCA who is a member of the YMCA and gets member benefits of the YMCA. So you can see how these things are working together.
Well, another subspecies in that world of private inurement, private benefit is excess benefit. So if you got a person who is performing services for the church, they can get paid. They can get paid a reasonable amount, and that’s absolutely fundamentally fine. But if you pay them too much, then that’s going to be an excess benefit transaction, and that could potentially result in all kinds of fines and fees and penalties, and sometimes even personal penalties against the board of directors themselves. It can start cascading down. That sounds really bad, and it is. And it is. So the question becomes, well, how do you avoid giving a minister “too much compensation”? Now a quick timeout. Ken, you and I both know that 9.9 times out of 10, we’re not wrestling with churches that are trying to give their ministers too much cash. If there are ministers that are listening to this, they’re like, “Oh man, to have that problem.”
Ken Tan:
It’ll be my burden to bear.
Chris Purnell:
That’s right. That’s right. It’s a hard one. So let’s keep that in mind. It’s one of those things where it does happen and back in the great days of the 1980s, there were some pretty bad actors who had really big hair and were on TV who just ruined the game for everybody else when it comes to compensation. So you used the R word, reasonable. You can pay them reasonable compensation. Well, what is reasonable? Well, the IRS is not going to define reasonable for you, sadly, but what the IRS will do is they say, “Hey, if you follow this process, then that’s going to be seen as de facto reasonable.” We can overcome that disposition to seen as reasonable, but it’ll probably be reasonable. So there are three things that you can do in order to help make sure that whatever compensation you’re paying is seen as reasonable by the IRS, at least initially.
Number one, that you get actual compensation study done, or you do some work to see for ministers of that experience and education level and for churches of our size. In this metropolitan area, this is how much we usually get. So get some comps. Get some comps for how much to pay this person. Number two, that the board has some kind of deliberation and that deliberation is actually noted in its minutes. So the board goes back and forth and says, “Yep, we like this compensation study,” or, “Hey, we got some questions. This is what we think.” And then number three, that the minister themselves is not a part of that process of determining how much they’re going to get paid. If you have those three things in place, then you’ve established what’s called a rebuttable presumption. A rebuttable presumption of not excessive compensation. Can the IRS rebut that presumption? They sure can. They sure can, but they have to marshal their own data in order to do that, which is a tough road to hoe.
Ken Tan:
Sure.
Chris Purnell:
So let’s talk about what this looks like on the street, on the ground. Usually Ken I’m seeing this in the retirement context. I’ll sometimes see it with just regular annual compensation, but something happens, especially with long tenured, well known, so like published authors, that sort of thing, people who have been very visible and/or founding pastors where there’s been significant growth over the course of their tenure. Maybe they’re like, “Hey, I started this thing in a coffee shop and to your point, we’ve got six campuses and-
Ken Tan:
We have five coffee shops in our campus. No I’m just kidding.
Chris Purnell:
That’s right. One of which is called Hebrews. That’s right. Which every church should have a coffee shop.
Ken Tan:
They should.
Chris Purnell:
They should.
Ken Tan:
That’ll be our next sponsor, Chris.
Chris Purnell:
Oh my gosh. May it be. So that’s right. It’s one of those things where you’ve got a beloved, well-known, long tenured, founding pastor who is now retiring. Can you give them a significant retirement gift? And the answer is you can, but just know that that’s just going to be lumped in with their annual compensation. And so if you have, let’s say, a million dollars in annual compensation and you give them a $3 million retirement gift, well, then you’ve bumped them up into a $4 million annual compensation amount, which could very well be unreasonable. There are ways to work this. You can spread it out over the course of years. You could do some kind of rabbi trust. You could create some other retirement vehicle, explore different options. There’s things to keep in mind and work through here. And this is where … I’m not going to go into too great detail because it’s way too nuanced, but it’s one of those things where we have had cause to walk with several churches in this.
And I want to share one more thing that’s not really in the tax world, but more in the public relations world with this sort of thing. So one of the churches that we worked with, they had, again, long tenured pastor, well-known guy, published author, took the church from X to 40X. He received a significant retirement package from the church. Well, this retirement package leaked out to the congregation, and this is a Midwest congregation. Ken, so I don’t know how familiar you are with the Midwest, but we take great pride in not spending any money on anything. And so for this pastor to get this kind of retirement contribution was anathema for many people in the congregation. And then it leaked to the press and it became this really huge to do where the church had to give explanations and say, “Hey, this is why we did this. We think that this is very reasonable, even though the number to most people would not smack reasonableness for a church.” You know what I’m saying? You and I get it because we work with ministers of very large churches.
And so it was just like a firestorm and the church wasn’t quite prepared to field all of those kinds of questions. So now after that experience, what I tell churches is, ” Hey, you should be prepared whatever you do, whatever the amount is to be able to have a conversation with your … honestly, your local newspaper, worst case scenario, but also your parishioners, should any of them have questions and want to discuss this.”
Ken Tan:
It’s one of those things like, are we ready to present something like this and what do you think would we expect? And this is where there’s this book and we touched it in our fraud episode of the greatest question is what is the wise thing to do? And it is something that even as a church, I’m not saying we don’t want to bless our pastor, we want to take care of them because of what they have done, but we want to have to make sure we do it where it is above reproach where it makes sense because ultimately, Chris, you and I know majority of pastors are not making a million dollars a year and they don’t those substantial things. They are having to do a lot of sacrificial work too at the same time. But as a church, you’re trying to find that right balance. And this is where some of these conversations come up so frequently for you and for me is because these questions are so pressing, especially for their leadership too.
Chris Purnell:
Ken, one of the questions that I do have … And I don’t know if you have experience with this, but churches are constantly looking for rules of thumb for how should they think about compensating their ministers. Some say, “Well, we’re going to look at what we pay, say, our public school teachers, or we’ll look at what’s the area median and income for our area.” And that’ll be the amount that we pay our minister. Are there any particular, I don’t know, rules that you use or that you think through when talking to churches about this?
Ken Tan:
I try to approach it of … It is a case by case basis, but you try to think about what is the cost of living? What is the average family income in this particular area? And could we afford someone to be able to do that as a standalone? Because a lot of times … And this is being very candid. Is typically even the pastor’s wife is serving in a capacity, even though they may not be directly employed by the church. They’re helping support their husband, and in this case, really making sure that they’re able to serve in different capacities to help serve and support that they are to an extent like a pseudo employee. And so we know … And this is what’s been nice, and I’ve seen this a lot, is a lot of these other denominations are also providing their own type of free data. It’s not the cleanest. So this is where part of it is essentially saying like, what differentiates some of the things we do from our executive comp studies is we’re doing more sophisticated calculations and all. It’s not meant to be a shameless plug, but there is free information out there now that people can look at, but don’t let that be just the finite, oh, this shows that in this particular area, the average income is 50,000. Then that means we’re going to pay our pastor 50,000. That may not be the case.
We have to think about, okay, it could be starting point of 50,000, but what additional benefits can we do as well? Because in an area where you’re trying to find a really good pastor, you have to also be somewhat competitive. And that means that what kind of things, if it’s not just cash, can we provide that provide some level of benefit that makes it where it’s great to not just attain, but also retain them too? And so there’s a lot of those things now. There’s free things you just go on a web search for. Church pastor salaries or position salaries, and there is data. Use that as a way to triangulate what makes sense. But the other part of it is being able to just consider what could be some pure data that could be useful because it is a sensitive subject. You even think about probably most congregations don’t know how much their pastor makes. It’s typically like the HR personnel committee and then maybe the finance committee, but a lot of times it’s pretty confidential. And so part of it is as a church is saying, well, if we’re being so private about this, we’re never going to actually get some outside data unless we’re willing to find some way to share in a way that is private, but then also allows us to get some insights on fellow sized churches too.
Chris Purnell:
That’s really good. That’s really good. And the hard part with reasonable compensation, especially in a church setting, is that it’s all in the eye of the beholder. You got someone who makes 50K and they’re like, reasonable, 50K. And you got someone who’s maybe a business owner or something like that and their definition of reasonableness is going to be radically different.
Ken Tan:
A little bit different.
Chris Purnell:
So yeah. This is important.
Ken Tan:
Think about it, Chris, there’s a lot of times people forget that even in a non-for-profit and a ministry setting too as well, I think to an extent … And this is just my own thoughts opinion. Is that being in a non-profit can be a lot more heavily regulated than an actual for profit, like a private company that is a public for profit organization because of the fact that you do have the benefit of being tax-exempt and therefore the government is going to expect that you’re staying above reproach. And that’s why these little nuances more than not probably aren’t the same types of conversations you’re going to see in the boardroom of a private, large company or even a publicly traded company. They have their own regulations, but to an extent, I think ministries and nonprofits are pretty heavily regulated more than people think they are.
Chris Purnell:
Yeah. Yeah. I would agree. I would agree. And if you’re an organization that files the annual form 990, that information return, then you’ve got to put sometimes your highest compensated employees and their compensation on that form 990, which is an interesting thing. So to your point about that extra accountability, for sure.
Ken Tan:
Well, I’m sure hopefully some of our folks are still awake. I think this is very interesting. As we start to land the plane realizing, time flies when you’re getting to talk about taxes.
Chris Purnell:
Oh my gosh. Doesn’t it?
Ken Tan:
Can you believe that Chris? I want to make it even more interesting, Chris, with some of the unique questions we have received. And I don’t know if you want me to start, and if you want to get your thoughts on it too, or if you want to start as well, I’ll give you the honor sir, is our tax leader here in terms of understanding and knowing more about taxes than me, that’s for sure.
Chris Purnell:
When you sent that email about, “Hey, let’s talk about the most insane or the unique things that we’ve seen.” It was like my brain did that thing where it just jettisoned all information and I was like, “Okay, what have I seen out there? Have I seen some crazy things?” And I’ll tell you this, this is not especially big. We’re not talking about big numbers, but I think it does illustrate some of the generational divide that can sometimes happen within churches and making sure that you’re having clear communication. So the story will illustrate both of those points. So I was talking with an executive pastor. He was probably a man whose age starts with a six. So he’s probably in his 60s, right?
Ken Tan:
Sure.
Chris Purnell:
And really great guy. He had been the biz for a long time and we were talking about accountable expense reimbursement plans. And this church had one of those. They had people that would oftentimes not turn in their receipts on time or ever and just expect that, “Hey, I swiped my church provided credit card, I don’t need to provide a receipt. It’s going to be fine.” And the biggest offenders were . And I hate to say this because they always get a bad rap. But it was the youth pastors. It was the youth pastors of this church. And the other thing that was happening often was that they were going out to eat a lot because Chris, these people eat all the time. And I’ll tell you this, there are some days where if I see Chipotle come across on the credit card statement just one more time, so help me. I’m so tired of seeing Chipotle.
Ken Tan:
We’re going to have a different come to Jesus moment. That for Sur.e is what you’re saying?
Chris Purnell:
That’s right. So I don’t know if Chipotle just opened in their area or whatever it is. I like Chipotle too. It’s great, but evidently this congregation or these staff members love Chipotle. But he just couldn’t quite understand why they were going to eat all the time. Now we get it, right?
Ken Tan:
Yeah.
Chris Purnell:
If you’re in ministry, you probably don’t want to have every single meeting on the campus. And so you want to go off campus. And what are you going to do when you go off campus? Well, you’re probably going to go to a coffee shop or you’re probably going to go to lunch. And if there’s lunch available, might as well make a Chipotle.
Ken Tan:
Might as well.
Chris Purnell:
So these ministers were doing that a lot. He didn’t quite understand it. He didn’t quite get it. He’s like, “What are they doing?” And so we just talked about that and wrestled with, “Okay, is there a valid business purpose to all these Chipotle meals?” The answer is probably yes, you can make the argument. But at the end, he goes, “Maybe I’m just a fuddy-duddy when it comes to this stuff. I just don’t get it.” And I was like, “I can certainly appreciate that.” Should they go to Chipotle as often as they do?
Ken Tan:
Probably not.
Chris Purnell:
Probably not.
Ken Tan:
And even health-wise. We’re not a health podcast, but it probably wouldn’t be good for you to eat fast food all the time. I know I travel a lot too, but you start even thinking about just from a perspective of churches are focused on relationships. We do the same thing. When you and I are going to conferences or if we’re at a client site and we go to lunch, typically my goal has been to try and have lunch with someone else because nothing really beats that level of connection than breaking bread with someone else and just not even talking about work, but just getting to know them. That’s right. A lot of times pastors, youth pastors are very relational focused and that’s where part of it is just trying to make sure, “Hey, do you understand why there are these lunches and all like that?” Sure, maybe there’s got to be a balance. Maybe not every day you’re going to Chipotle or Starbucks or any of the other fast foods, but we get that there’s that relational component too as well.
Chris Purnell:
Yeah.
Ken Tan:
Well, I guess I could share. I’ll see if I go one by one on some of these ones. So I had received one, this was a while ago and this was a pastor that was about to go on sabbatical. And during the two months, they had reached out and they just said, “Hey, can I claim my Disney trip as a business expense?” And I had to pause for a second and just be like, “Well …” immediately I was going to …” Ultimately, no, but this is where … I just want to say, I had to pause for a second by saying, “How are they going to justify it?” They essentially said in their mindset that it was their way of going to not just be rejuvenated, but to use that time to do vision casting about the different people around the world that are lost and what better placed than Disney where everyone else comes in from all around the globe. And I said, “That’s absolutely creative. I got to give them A for creativity.”
Chris Purnell:
That’s right. Effort.
Ken Tan:
I had to really emphasize and saying can you yourself fully justify that as a business expense that you’re truly not doing that for pleasure, but doing that truly for business? Are you truly spending the majority of your time actively scouting, people watching? Are you scouting out? Are you talking to people? Are you sensing those things? Things that ultimately at the end of the day you’re saying, “Well, I’m not going to say what you’re doing is very bad, but this is where part of it’s saying, let’s step back and say, is this the wise thing to do?” Ultimately the answer was no, and they got to their answer about that, but this is where part of it is sometimes they just want to think through, could I potentially do that? Because a lot of times people think about their taxes, but how can I minimize my tax exposure in this and could this be one? Well, for this one, I would say no. And so I don’t know what you think, Chris. You may be completely wrong. You might say Ken, you’re completely wrong.
Chris Purnell:
You’re totally wrong. I do all my business meetings at Disney World. Man, how amazing would that be? That’d be a lot of fun.
Ken Tan:
I know, right?
Chris Purnell:
No, you’re absolutely right. But it points up a bigger issue that we see a lot in the expense reimbursement space. What’s the line between a personal expense versus a ministry expense/business expense? And those things that are on the bubble, this one’s not in the bubble, this one’s clearly personal. But I had one client who came to me and she was like, “Hey, as part of my job, Chris, I have to get up in front of the cameras a lot and do a lot of interviews with some three letter networks that you would recognize.” And so I got to look good. I got to look good. So what about my wardrobe? What about my makeup? What about all these other items? I have a daughter, and so I know a little bit about makeup, but man, she was throwing out some terminology. I was like, “I don’t even know what that is.” So all these beauty products and that kind of stuff. Would those be things that could potentially be reimbursable on a pre-tax basis? And the answer is most likely not. Sometimes people feel like, “Hey, but I bought this suit or I bought this really nice dress for this particular interview.” The IRS, it has very strict rules when it comes to “uniforms”. It must be one of those things that you can only wear for the job.
Ken Tan:
Sure.
Chris Purnell:
So unless it has Costco written on it on your suit or on the dress itself, then chances are it’s not going to be something that you can actually have reimbursable on a pre-tax basis. Same goes with makeup and stuff. I’m like, “Listen, I get it, but that’s going to be your makeup.” It’s not like it’s going to be you just use it and then you just give it back to the organization, but rather it’s something that it’s yours.
Ken Tan:
Again, it is that whole uniqueness of just these questions. Again, we try our best. We’re not making fun of anyone here, but it’s just these are the things we go through and we have to do it with a straight face because again, we probably see so many different scenarios that typically a church may not, and that’s why they ask these questions. I guess I’ll preface on this one. My wife and I would always love to have a future homestead. It all starts with sourdough.
Chris Purnell:
There you go.
Ken Tan:
And that’s where eventually, maybe if the Lord allow us, we’ll have little homestead and raise some chickens. But this is why I thought about this question. This came from a local church. And I was speaking at a local area, a local church seminar, and someone came up because we were talking about expenses and the person was so sweet and they did say this with a straight face saying, “So we have a weekly potluck, which I’m all for. I grew up that way. I love potluck. It could be a Midwestern thing, could be a Southern thing. We love our potlucks. Don’t get in the way of it. Come 12:15. We are getting that set up whether you like it or not pastor.” Well, they asked me, “If I raise chickens for the church potlucks, is that a business expense?” That was one of the ones where I had to pause for a second to be like, “Wow, that is creative.” But unfortunately, the IRS does not recognize potluck farming as a trade or business in this case. And so therefore, I think you should probably just approach it and say, “It may not be worth the time and effort to try and justify the chickens for the potluck lunch and consider it more so as just, hey, this is a mutual benefit for all of us here and it’s meant to be a time of fellowship.”
Chris Purnell:
That’s right.
Ken Tan:
Yeah.
Chris Purnell:
That’s right. Oh my goodness. Oh my goodness.
Ken Tan:
Maybe you have one more, Chris. I have one more just in case. I know we’re using a lot of time, but I want to make sure I give you some time to think of maybe one more or two.
Chris Purnell:
One of the ones … And this is not a crazy story, but it’s one that I’m seeing more and more often. And that is that churches that have really well-functioning and delicious restaurants that are actually on church campus, right. And I’ve had this now three or four times that I’ve seen churches that … And then they’re on the church grounds, they’re open to the public. And is that going to be considered unrelated business taxable income? And it’s so fascinating because many of these churches, they’re using it as an outreach to the community, not only bringing people into the church and saying like, “Hey, you’re on a church ground, but have a delicious hamburger too.” But also the people that they employ are sometimes people who have criminal records or otherwise-
Ken Tan:
A tarnished past.
Chris Purnell:
That’s right. That’s right. They’re not otherwise as employable. Maybe there’s some addiction and mental health issues that are in the background. And so just giving them that safe place to learn how to show up on a daily basis and that sort of thing. Near and dear to my heart. I love it. Is that going to be considered an unrelated business? And the answer is it depends. So if you can show that this is really aligned with the way that you do your operations and the way that you do your exempt purposes, there’s a slim chance for showing that maybe it’s not an unrelated business. But man, 9.9 times out of 10, that’s going to be an unrelated business for which you have to pay tax.
Ken Tan:
And that’s where … Again, this is where as a church, you start thinking about you want to be the focal point for the community to come together. And what great way then to be able to provide those opportunities. But this is where we’re just trying to say we want to stay above reproach and whether it’s at the church doors or even it’s back at home.
I think of just one more situation I had as well, and this is where part of it is just going back to what’s deductible and what’s not. And this pastor did ask me … Of course, for this particular church baptisms are a big deal too as well as it is for my home church. But they did bring up the question of, if I baptize people in my pool, can I deduct the pool? And again, give them kudos for creativity. Give them the ability to consider asking that question. At least they feel comfortable asking it. So I say, “Creative yes, deductible, no.” And that’s where, again, we just want to be able to have this as a time for us to say, look, there’s no such thing as an unwise question. We’d rather you ask us that question and we can walk it through with you rather than you suddenly make those assumptions and then now you’re dealing with having to justify it with the IRS, which probably already no is the answer and is trying to see what ways you’re going to come up to justify something that probably is not going to be held up. And that’s why I enjoy these types of conversations, Chris, is just the ability for us just to be able to be that sounding board because of what we’ve seen before with other churches and their experiences too.
Chris Purnell:
Well, it really is a privilege and honor to be a trusted advisor for a lot of these ministries, knowing that they’re out there trying to do some really important work and we just get to come alongside and provide that nuanced expertise that they really need in order to stay out of hot water and focus on the work that really they’re intended to do.
Ken Tan:
Well, this is one of the things … I’ve always enjoyed this time we have together, Chris, and it’s definitely been a fun time, even spending over an hour on taxes. It’s something where I know this is something that’s relevant for our pastors, our leaders, and our hope is we’ll probably have some more episodes on this in different ways, shapes or forms too. So appreciate you, Chris. Always enjoy this time with you, sir.
Chris Purnell:
Likewise, Ken, always a pleasure. And hey, maybe next time we’ll have a part two about some even crazier tax things because I’m sure this is going to be like a scintillating episode that people just can’t get enough of so I-
Ken Tan:
Probably and evening. Yeah. An evening session brought to you by Depends. As you can tell, we’re really leveraging … You’re getting some sponsorship, which we probably will never, but again, at least we’re having fun, right?
Chris Purnell:
That’s right. That’s right.
Ken Tan:
Awesome, Chris. Well, hey man, have a great day. I appreciate you. I can’t wait for our next episode together.
Chris Purnell:
Same to you, brother. Take care, man.
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