Skip to main content

The Deason Rule

Question:

A minister has been using tax preparation software for years. He is paid as a Form 1099-MISC, self-employed pastor. The program sent him to a worksheet which took his Schedule C business expenses and reduced them by a percentage of income attributed to housing allowance. He had never had that happen before. Is there some new regulation or provision in the tax code?
Answer:

What the minister is dealing with here is something called the Deason Rule, and it is based on a tax case going back to 1964. The rule applies to clergy who are able to take business expense deductions for unreimbursed business expenses. According to the IRS: “A minister may deduct ordinary and necessary business expenses. However, if a minister's compensation includes a parsonage or housing allowance which is exempt from income under IRC § 107, the prorated portion of the expenses allocable to the tax exempt income is not deductible, per IRC § 265, Deason v. Commissioner, 41 T.C. 465 (1964), Dalan v. Commissioner, T.C. Memo. 1988-106, and McFarland v. Commissioner , T.C. Memo. 1992-440.”

However, the pastor can avoid the Deason Rule by having the church set up an Accountable Plan for his professional clergy expenses. Under such an arrangement, the church establishes part of its minister’s compensation package for ministry expenses. The minister is reimbursed for those expenses. By doing this, the pastor will not have unreimbursed expenses that will be of limited tax benefit. Hint: This would be a good time to use this blog’s search window to find and review Accountable Plans.

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. Mariya Bondarenko of Minnesota gets credit for this one.

Comments

Popular posts from this blog

Housing Allowance and Form 1099-MISC Reporting

Question:

A church provides its minister a housing allowance, but for other purposes it believes that it must report the full amount of compensation (including the non-taxable housing allowance portion) on Form 1099-MISC (in order to demonstrate the full earnings of the minister). If the church reports his compensation,including the housing allowance, on Form 1099-MISC as taxable income, will he be able to deduct his housing expenses somewhere else on the Form 1040?

Answer:

This questions brings up a couple of issues. First, most ministers are properly classified as employees who receive Form W-2, not as independent contractors who receive Form 1099-MISC. On Form W-2, Box 1 for taxable compensation is reduced reflecting the church's designation of a portion of his pay as non-taxable. Then in Box 14, it typically reports as a memorandum item his additional non-taxable, housing allowance compensation. In the situation addressed in the question, this Form W-2 reporting may or may not a…

Heath Care Sharing Ministries and the SE Insurance Deduction

Question:

Can payments made to a health care sharing ministry (e.g., Samaritan Ministries, Christian Healthcare Ministries) which are exempt from the Affordable Care Act be deducted from income as a self-employed (SE) insurance deduction?

Answer:

First, to be technical, "health care sharing ministries" (IRS exemption D) provide participants an exception from Shared Responsibility Payments (ACA penalties), but don't connote other tax benefits.

Second, a health care share ministry does not qualify as health insurance. One does not pay what the IRS considers to be premiums, but instead shares the health expenses of others. And according to IRS Pub 535, in order for self-employed individuals to qualify for a SE insurance deductions they must be to pay premiums for qualifying health insurance. 


Church Car Purchase for Pastor

Question:

A church would like to purchase a car for the pastor's use. What is the best method to accomplish this goal? Should the car be titled in the pastor's name? What will be the tax consequences of this arrangement?

Answer:

The church has two main alternatives for this purchase: 
Title the car in the pastor's name and reimburse him for business expensesTitle it in the church's name and treat personal use as taxable compensationThere are fewer immediate tax consequences for the latter. Since both are viable options, we will discuss both situations in this post.

If the church chooses to give the car to the pastor and register it in his name, he is free to use it for whatever personal use he desires with no tax consequences. However, the fair value of the car is taxable as compensation at the time it is given to the pastor. Internal Revenue Code section 102(c) clearly states that gifts given to employees by their employers are taxable compensation. The church can reimburs…