MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: A pastor receives a Form W-2 from the church reporting his compensation. The church cannot offer him an office at the church so he does most of his studies at home. Can he claim some of the home expenses for his church office? The pastor was told that he could do it if the church gave him a Form 1099 but not if he received a W-2. Answer: Employees (ones who receive Form W-2) are eligible to claim office-in-home deductions on Form 2106 if none is provided by their employers. Independent contractors who receive Form 1099-MISC from their customers may deduct an office-in-home using Form 8829. Some churches erroneously issue Form 1099-MISC to their pastors but this does not prohibit legitimate office in home deductions. The office in home deduction may reduce his income tax by virtue of its inclusion as a miscellaneous itemized deduction (Schedule A); the calculation is determined on Form 2106 and transferred to Schedule A. (The use of a ministerial housing allowance wi...

Question: A church gives money directly to a missionary in honor of 25 years of service in the field. The church issued a 1099-MISC and reported it in Box 7 (non-employee compensation). The missionary's tax preparer tells him that the church incorrectly reported it in box 7 and that it should have reported it in Box 3 (other income) since it was a gift, trying to avoid him having to pay self-employment tax on the monies. When, if ever, should monies paid to missionaries be reported in box 3 rather than box 7? Answer: The church has filed the form correctly. The instructions to Form 1099-MISC leave little room for negotiation in this matter. The Minister Audit Technique Guide produced by the IRS states:"There are numerous court cases that ruled the organized authorization of funds to be paid to a retired minister at or near the time of retirement were gifts and not compensation for past services. Rev. Rul. 55-422, 1955-1 C.B. 14, discusses the fact pattern of those...

Question: A donor gave a large sum of money in 2009 to a church's designated fund for missions travel. It was announced that only a small portion of the fund (essentially the portion not received from the donor) was available to the general congregation and that the remainder was sequestered for the donor's 2010 missions travel. Does this procedure comply with the Internal Revenue Code? Answer: Publication 526 indicates that travel for charitable purposes is deductible in many cases. Below, I've reproduced a significant section from the Publication. To me, the bigger issue is not whether the travel is deductible but whether the deduction is allowable in 2009 or 2010 and who must defend its appropriateness in light of the tax rules. Had the donor simply paid for his own expenses, then he would have done so, presumably, in 2010. Also, he personally would stand responsible before the IRS to substantiate his answers to the questions implied in Publication 526 (again, ...

Question: A missionary was sent by his home church in one state to another state two years ago to help start a church and other ministries. His church sends monthly support. Can he claim the rent and utilities for his rental house in the mission location as business (travel) expenses? He maintains a permanent residence back in the state of his home church. Also, if the housing qualifies as travel expense is there a limit to the amount he can claim, such as an amount equal to the ministry support received? Answer: Travel away from one's tax home is only deductible if it is on a temporary assignment. IRS Publication 463 discusses temporary versus indefinite assignments. "If your assignment or job away from your main place of work is temporary, your tax home does not change. You are considered to be away from home for the whole period you are away from your main place of work. You can deduct your travel expenses if they otherwise qualify for deduction. Generally, a tempo...