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Minister Buys Business Vehicle with Church's Help

Great Question:

A church wishes to buy its pastor a new vehicle and has the cash to pay for it outright. Possible tax strategies:

1 – Church owns the vehicle and the pastor keeps log of business versus personal use; the value of his use is included on his Form W-2. Negative: this also keeps the insurance policy in the church’s name which somewhat exposes the church.

2 – Church pays for the vehicle and titles it to the pastor (15% federal income, 5.75% state income plus 15.3% self-employment (SE) taxes paid on the vehicle value; the taxes could be paid partially by the church by grossing up the pastor’s salary). Negative: all income coming into play in one year and the possibility of pushing the pastor into a higher bracket.

3 – Pastor owns the vehicle and finances it – church pays pastor additional paycheck each month grossed up for taxes and after deductions leaves enough net pay for making payment.

"Answer" (in quotes because my response will mainly be simple comments):

1 – This option also avoids the sales tax cost since it is purchased and owned by a tax-exempt entitity. This may only be advisible if the pastor has his own personal vehicle and limits personal use to his commute and other minor use.

2 – While costly, this option at least removes a church obligation for auto insurance and maintenance and gives the pastor total control over his vehicle. However, the church has used up its cash for this one time purchase and may not be able or interested in other tax-favored disbursements.

3 – I like this option the best, but suggest that the church consider funding a 33 or 50 percent down payment on the car in 2009 (subject to the taxes noted above in #2), then issuing a bonus on January 1, 2010 (and 2011 if three years are used) to permit rapid pay down of the debt by the pastor. Spreading out the disbursements may also save the church its current cash reserve in order to fund a professional expense reimbursement plan for the pastor's ministry miles. Even without this plan, the pastor can deduct his business use of the vehicle in the determination of his SE tax. However, unreimbursed business use of his vehicle offers significantly reduced benefits for federal income taxes (through the use of Form 2106 and Schedule A). Some state income tax formulas deny tax benefits entirely for unreimbursed employee business expenses.

Comments

  1. A variation on your question:

    Church enters into a 6-year auto loan commitment ($904.68 per month for 72 months). The vehicle is registered in the church's name and the church pays all expenses (insurance, maintenance, etc.)

    The pastor of the church drives the vehicle exclusively and does not keep a mileage log.

    According to IRS regulatons, how does the church treat the expense of the vehicle at the end of each year?

    Thanks

    ReplyDelete
  2. Since the pastor does not keep a log, the entire value is taxable to him. Then, he can determine how must he can deduct as an employee business expense (Publication 15-B (2010), page 21).

    Valuation of the taxable portion is not an easy task. See Publications 15-B and 535. If the church was simply making the monthly loan payments but the pastor was responsible for all other cost (including the sales tax avoided by titling the car in the church's name), then the additional income would simply be the $904.68 per month payment.

    As one might be able to easily detect, I am not in favor of arrangements like these because they place a tremendous burden on the church to make sure it is in compliance with tax law.

    ReplyDelete
  3. Can a Church sell a vehicle to the pastor and how would this be reported if the vehicle was sold for less then appraised value?

    ReplyDelete
  4. Yes a church can sell the vehicle to the pastor, but there are consequences for doing so. The bargain purchase amount (market value in excess of selling price) is taxable as ordinary wages and, therefore, reportable on Form W-2.

    ReplyDelete

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