Church Law Group’s Recommended Best Practices to Prepare for the New Year
By: Kristina Denapolis West and J. Matthew Anthony
With the conclusion of yet another year, many clients need a gentle reminder their business affairs need to be wrapped up along with the presents under the Christmas tree. Don’t let the excitement of the holidays and fellowship push your business needs to the back of the buffet line. Our firm’s church lawyers recommend the following end-of-year best practices to ensure smooth sailing into 2022 (and beyond):
1. Provide Accurate Donor Receipts
Church donors enjoy tax a deduction for their contributions only if the donor maintains certain written records. As a courtesy and to encourage continued giving, many Churches and nonprofits provide a written acknowledgement to their donors. Written acknowledgments required to substantiate a charitable contribution of $250 or more must contain the following information:
- Name of the organization;
- Amount of cash contribution;
- Description (but not value) of non-cash contribution;
- Statement that no goods or services were provided by the organization, if that is the case.
- Description and good faith estimate of the value of goods or services, if any, that organization provided in return for the contribution; and
- Statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.
It is extremely important to provide accurate records to donors, as the IRS can fine a church or nonprofit that issues a false acknowledgment to a contributor up to $10,000 for each occurrence. It’s best to prepare and prevent such a situation before it occurs.
2. Set a Budget and Determine Executive Compensation Matters
With each year, the Board of Directors or other designated persons should meet to review its annual budget and account for any compensation planned for its executives and staff. An executive compensation study is a useful and valuable aid in helping to determine and meet the IRS’s reasonableness requirement as it concerns executive compensation. An executive compensation study is a professional report secured by the Board of directors or other appropriate persons in order to set reasonable compensation of certain highly compensated individuals. A compensation study, completed by an expert in the business of preparing such studies, gathers data within an organization and also from comparable outside organizations so that appropriate salaries can be determined and maintained.
Any individual considered “highly compensated” should have a compensation study performed to justify their compensation if ever inquired of by the IRS. In a church, this typically will include the senior or lead pastor and sometimes the executive pastor and chief financial officer. In a ministry that is not a church pursuant to the rules of the IRS, the chief executive officer should have a compensation study, and perhaps the compensation of the chief operating officer and the chief financial officer should be studied as well.
We also advise that an independent compensation committee meet, review, and establish executive salaries. Usually an independent compensation committee is a subcommittee appointed by the board of directors to conduct fact finding of comparability data regarding the compensation of executives and disqualified persons in the organization. This committee reports its findings back to the board and makes recommendations thereon.
3. Conduct an Annual Conflict-of-Interest Policy Review
Because members of the board of directors owe fiduciary duties to the organization they serve, we suggest that from time to time, and at least annually, the board review its conflict-of-interest policy. We also strongly recommend that the board or other governing body develop and implement a process for disclosure and voting when situations arise in which sitting board members may, actually or potentially, derive personal or professional benefit from the Church’s activities or transactions. The Church Law Group frequently drafts and counsels boards on any conflicts that may arise.
4. Review and Approve Housing Allowance Requests
Churches should ensure all requests for housing allowances for pastors are made in writing, turned in, reviewed by the board or other body responsible for approval of housing allowances and approved prior to such allowances being paid for the coming year. It is extremely important to remember the requirement that approval of clergy housing allowance requests must be undertaken and approved in writing prior to any payment of the requested allowance being made.
The attorneys and legal professionals at the Church Law Group can assist church clients to ensure the proper applications and approvals for clergy housing allowances are undertaken properly in order to meet the requirements required by law.
5. Annual General Meeting and Ratification of Corporate Actions
Be sure the organization has held its annual general meeting of the board during the preceding year. Most jurisdictions require nonprofit tax-exempt entities to hold at least one meeting of their board of directors annually.
At the annual general meeting of the board of directors, the directors should ratify all lawful acts of the organization undertaken during the preceding year. This is recommended in case any previous action of the organization requiring approval of the board was undertaken without such approval having been formally considered by the directors or evidenced in writing via a resolution of the board. The directors, by ratifying all lawful acts of the organization during the preceding year, can ensure all of the organization’s endeavors requiring their consent and approval have received proper authorization and help in shielding the organization from accusations it engaged in unauthorized acts.
Our church lawyers are available to assist your organization in training its board members to ensure compliance with applicable laws and best practices. We want to see each and every client succeed. We are also happy to conduct a shorter “Q&A” event with the board, individually or collectively. Appropriate training and guidance places the board in a position that not only safeguards the organization and its resources, but also protects individual board members from potential personal liability.