Housing Allowance Expenses: Cash or Accrual?

Question:

A minister was billed for his utilities the year after the expense was incurred. Should he deduct the expense in the year he incurred the expense or in the year he paid for the expense?

Answer:

By default, virtually all individual taxpayers are expected to report their income and deductions on a cash basis. This means that income received during the calendar year is taxable in that tax year. Also, expenses incurred are deductible in the year paid. This is also true of minister's housing expenses as illustrated in the above question.

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Housing Allowance and Form 1099-MISC Reporting

Question: A church provides its minister a housing allowance but believes 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. (Starting in 2020, Form 1099-MISC is replaced with Form 1099-NEC for non-employee compensation.) If the church reports his compensation, including the housing allowance, on the Form 1099-NEC as taxable income, will he be able to deduct his housing expenses somewhere else on the Form 1040? Answer: This question 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-NEC . Box 1 on Form W-2 reports taxable compensation. It is reduced to reflect the church's designation of a portion of his pay as non-taxable housing. Then, in Box 14 (Other), Form W-2 typically reports as a memorandum item his additional non-taxable, housing allowa

MinistryCPA - Corey A. Pfaffe, CPA, LLC

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