September 22, 2011

Expenses for Wife Attending Conference with Minister

Question:

Is it allowable for a minister to use funds from his professional expense reimbursement plan to pay for the registration of his wife at a Christian conference?

Can the minister and his wife be classified as a “ministry team” and therefore allow such an expense?

Answer:

IRS Publication 463 indicates that an employer cannot deduct payments (or reimbursements, including those through an accountable plan) for a spouse accompanying an employee "on a business trip or to a business convention," unless that spouse is also 1) its employee, 2) has a bona fide business purpose for the travel, and 3) would otherwise be allowed to deduct the travel expenses."

These rules also apply to tax-exempt employers (e.g. churches) even though they are unconcerned about losing deductions since they pay no income tax in the first place (Federal Tax Regulation 1.132-5 (t)(2).

However, this does not necessary give the whole picture. Internal Revenue Bulletin No. 1996-26, Regulation 1.132-5(t)(1), and the IRS's own "Executive Compensation - Fringe Benefits Audit Techniques Guide (02-2005)" (available on the IRS website) provide that "the amount will be excludable [as taxable income to the employee/minister] as a working condition fringe if it can be shown that [the] spouse’s presence has a bona fide business purpose and if the employee satisfies the substantiation requirements under § 274(d) (i.e., business purpose, date and amount of expense documented on a timely basis).

The bona fide business purpose must be clearly established. Publication 463 states: "A bona fide business purpose exists if you can prove a real business purpose for the individual's presence. Incidental services, such as typing notes or assisting in entertaining customers, are not enough to make the expenses deductible." Of course, this determination is subjective. But there certainly are numerous cases where the wife's presence serves a real business purpose.

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