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Review of Car Allowance

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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.
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