Skip to main content

Review of Car Allowance

Question:

A church approved a “car allowance” for one of its pastors. The pastor is considering a lease or new car purchase. What will be the effect of his options on his taxes?

Answer:

Any car allowance should be set up using an “accountable plan”, which must meet three requirements under the Internal Revenue Code Sec. 62(a)(2)(A): the reimbursements must have a business connection, must be substantiated on a timely basis using the mileage records kept by the employee, and must be returned to the employer to the extent they exceed actual expenses. Using an accountable plan allows the car allowance to be excluded from an employee’s income on his Form W-2. Mileage records should include the date, business purpose, and number of miles for each trip. The IRS sets maximum per mile rates (55.5 cents for 2012, according to IRS Notice 2012-1). If the actual miles multiplied by the IRS rate is less than the allowance, the pastor must return that amount to the church, otherwise the full allowance would be included in his income.

Readers of this post should search other blog entries regarding alternatives to “car allowances” – specifically, more flexible professional expense reimbursement plans. Also, leases can complicate the reimbursement arrangement, but that’s a topic of a future post!

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. Kyle Krohn of Iowa gets credit for this one.

Comments

Popular posts from this blog

Review: Form 1099 Payments to 501(c)(3) Organizations

Question: A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC? Answer: Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The IRS Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC.  The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC: Rent paid to an individual (non-corporation) Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers) Support sent directly to missionaries

Debits and Credits for Designated Gifts

Question: A church is setting up QuickBooks for its accounting, but its personnel have little experience with fund accounting. What are the entries for the receipt and disbursement of designated gifts and the opening balances? Answer: We recommend that most churches that do not need to present financial statements in accordance with Generally Accepted Accounting Principles (GAAP) observe the following steps. Even those churches that do report using GAAP can employ these methods but must make some adjustments when preparing their financial statements. What we will demonstrate relates to what most churches call "designated gifts" (CPAs call these  Temporarily Restricted  gifts). These are gifts that donors contribute with the intention that the church will spend the funds as they direct. Most churches do not receive "endowment gifts" in which donors prohibit the expenditure of the core gift (CPAs call these  Permanently Restricted  gifts). Only earnings on the subsequ

Rental of a Church Parsonage to a Non-Minister

Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant.  IRS Publication 598  states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property.  However, a second concern not a