In the course carrying out ministerial duties, a minister will incur various expenses that are related to his or her occupation. Some of these may be reimbursed by the employer, while others may be the expense of the minister. What is the criteria for reimbursing or deducting legitimate business-related expenses?
Whether an expense is reimbursed by the employer or if it falls on the minister to pay, the same IRS guidelines apply. An expense must be “ordinary” and “necessary under IRS rules. Business expenses do not include capital expenses such as a computer or other equipment. However, these may be depreciated in most cases. Personal expenses are not deductible business expenses.
Ordinary and Necessary
The terms “ordinary” and “necessary” carry specific definitions for tax purposes, and the common use of these words is not applicable here. Ordinary expenses are items that are commonly used, and accepted in the line of work. As a minister, items such a commentaries or other books, software, meals with prospective members, and mileage for church-related trips would be examples of ordinary expenses. An expense is necessary if it is helpful and appropriate in performing job duties. Focus on the word “helpful,” it does not need to be absolutely required in order to properly conduct one’s occupation or business. Necessary may depend on the individual situation. To use a non-church example, someone who uses his or her automobile for business purposes is incurring a necessary expense. However, in most cases, purchase and use of a Rolls Royce is not necessary. If the person is a lawyer or agent to the wealthy, it may be necessary to have such a vehicle in order to accommodate the wants of clients. An expense must be both ordinary and necessary to be deductible or reimbursable. If in doubt, ask the question “Does this expense directly pertain to performing my job function?”
Accountable Plan vs Allowance
A church should adopt a policy for reimbursement of expenses. This should be an accountable reimbursable plan. Under this type of plan, the church specifies what expenses will and will not qualify for reimbursement. When an expense is incurred, the minister should submit a request for reimbursement within 60 days, providing receipts or mileage logs and the reason for the expenditure. If using a church credit card, the minister should document each purchase that is charged to the card. Under this type of plan, the expense and the reimbursement do not appear on the minister’s 1040. Mileage must be reimbursed at the prevailing IRS rate or less. If the accountable plan does not meet all IRS requirements, it is a non-accountable, or allowance plan.
The alternative to an accountable reimbursable plan is an allowance plan. Under these plans, the minister is given a set amount each month for ministerial expenses. However, the minister does not account to the church for the expenditure of these funds. The allowance amount is taxable income and should be included on the minister’s W-2. The minister may deduct the expenses incurred as miscellaneous itemized deductions on Schedule A. Unfortunately, they are subject to the two-percent limitation, so the minister can only deduct those expenses that exceed two percent of his or her adjusted gross income. And the minister must be able to itemize deductions or he/she gets no deduction. This type of arrangement can be very detrimental to the minister from a financial perspective.
Travel and Expense Reimbursement Policy
In order to avoid misunderstandings, the church should adopt a policy, specifying what expenses will be reimbursed, and in what manner. It will also specify the procedure for reimbursement. The policy should cover the frequency and required information that should be included on the minister’s expense report. Other items that may be included in the policy are:
1. Receipts for expenditures
2. Church credit card regulations
3. General travel requirements, including air travel and lodging guidelines
4. Per diem amounts for out-of-town meals
5. Entertainment and business meetings
6. Other reimbursable expenses
7. Specific expenses that will not be reimbursed
Schedule C Expenses
Ministers frequently have supplemental income from performing weddings, funerals, counseling sessions, or other activities related to the ministry. Since the minister is usually paid directly for these activities, the income and expenses should be reported on Schedule C. The minister may deduct expenses related to these activities on Schedule C. If an expense is not reimbursed by the church and relates to both church and supplemental income, the cost should be allocated between the two in a reasonable manner.
Unless the minister has opted out of social security and Medicare, he or she is responsible for paying the self-employment tax on Schedule SE. In doing so, any Schedule C income should be included. In addition, the minister may deduct any unreimbursed ministry expenses from his or her income in determining the amount subject to self-employment taxes.
It is important from an IRS perspective, as well as from an ethical view, that all funds disbursed by the church should be properly handled. Expense reimbursements to ministers is a very visible area but also one that can be easily abused. Setting and following policies for these expenditures is a necessity to allow a church to financially accountable. It will also serve the minister, as there should be no question about improper expense reimbursements.