October 03, 2014

Cell Phone Reimbursement by Church

Question:

One of our pastors recently upgraded his iPhone and submitted for reimbursement through a professional account. Is it proper for the church to refund him fully as a non-taxable reimbursement? 

Answer:

The italicized excerpt below is taken from IRS Publication 15-B. We have added some of our own comments, which are in parenthesis and underlined. 

The value of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a working condition fringe benefit. Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a de minimis (non-taxable) fringe benefit. 

Noncompensatory business purposes. You provide a cell phone primarily for noncompensatory business purposes (the cell phone should not be a disguised way to give the pastor more compensation) if there are substantial business reasons for providing the cell phone. Examples of substantial business reasons include the employer's:
  • Need to contact the employee at all times for work-related emergencies (certainly seems to fit the description of most pastors)
  • Requirement that the employee be available to speak with clients at times when the employee is away from the office (also appears to apply to most pastors), and 
  • Need to speak with clients located in other time zones at times outsides the employee's normal workday. 

Basically, the IRS is saying that organizations are not required to report employer-provided cell phones as income to its employees as long as the cell phone is provided primarily for noncompensatory business purposes. If the iPhone is the pastor's only personal phone, then Publication 535 would likely lead to the conclusion that it was not primarily for noncompensatory business purposes. 

So then who reports the expense of the phone?

An individual can deduct certain un-reimbursed employee expenses on his/her tax return under certain circumstances. When considering the reimbursement of the phone upgrade, the pastor and church should keep in mind the following items:
  • The person or organization who pays the expenses is the one who gets to deduct them. So, if the church pays for an expense or reimburses the pastor for one, the pastor cannot take a deduction for that expense. 
  • If the pastor pays for his own expenses and doesn't get reimbursed, then he might be able to deduct them on his tax return. However, there are some limitations and restrictions on what and how much he can deduct. 


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