February 27, 2011

100% Housing Allowance with Expenses

Question:

An ordained pastor receives part-time compensation from his church, designated 100% as housing. In order to pay SE tax on the housing allowance amount, where does he record this on his tax return?

He has a few expenses that he could deduct, but is hesitant to do so while showing no income. Should he deduct these expenses?

Answer:

Since 100% of his compensation was designated as housing, none of his expenses are deductible as business expenses on either Form 2106 or Schedule C. However, when calculating his SE tax, the deductions can be applied before entering his SE income on Form 1040, Schedule SE.

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