July 11, 2013

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 expenses
  • Title it in the church's name and treat personal use as taxable compensation
There 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 reimburse him at the standard mileage rate for any business use of the car. Under this arrangement, he should keep a current, detailed log of business use in order to facilitate reimbursement of business expenses. If the church chooses to give him the car outright, he will also be personally responsible for repair, upkeep, and insurance expenses. To the extent that those expenses are paid by the church, they will be treated as taxable compensation.

If the church chooses to purchase the car in its name, the immediate tax consequences are more advantageous to the pastor. The church can, and should, pay all expenses, including insurance, repairs, upkeep, and fuel. To the extent that he uses the car for business use, he should keep a log, but the church will not be required to report taxable income to its pastor. Any personal use will be taxed as compensation at the standard mileage rate, unless the pastor chooses to reimburse the church at that rate for any personal use. The standard mileage rate for 2013 is $.565 per mile. The key difference is that all expenses can be paid by the church, with only personal use taxed. However, if the car is given outright to the pastor, the value of the car itself is taxed, and only expenses directly related to business use can be reimbursed with no tax consequences.

This blog response has been prepared assuming that the church will be purchasing a car, rather than simply reimbursing the pastor for business use of his personal car. While each treatment has its advantages, registering the car in the church's name is especially recommended if the car will be used largely for business purposes. Any church considering a purchase of this size should consider the benefits and tax consequences of each treatment in order to make the best decision.

2 comments:

  1. If purchasing a car and gifting to the minister, how should the church report this taxable income - on the minister's W2?

    ReplyDelete