July 17, 2009

Designation of Housing Allowance by an LLC

Question:

If a minister forms an LLC for his church consulting, preaching and pastoral counseling ministries can a portion of his income be designated as housing allowance?

Answer:

No, the Minister Audit Technique Guide, published in April 2009, clarifies this.

According to the Guide, "IRC § 107 provides an exclusion from gross income for a 'parsonage allowance,' housing specifically provided as part of the compensation for the services performed as a minister of the gospel.

"The exclusion under IRC § 107 only applies if the employing church designates the amount of the parsonage allowance in advance of the tax year. The designation may appear in the minister's employment contract, the church minutes, the church budget, or any other document indicating official action. Treas. Reg. § 1.107-1(b)."

The designation must be made by a church or qualifying IRC 501(c)(3) organization (e.g., certain religious educational institutions) for the services of a minister performing functions for its ministry. As stated in the question, a self-employed minister providing services to churches may request that they designate a portion of his compensation as housing allowance before it is disbursed by the church. But a sole proprietor LLC cannot designate receipts as housing that were not classified as such by the disbursing congregation.

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