Skip to main content

Accountable vs. Nonaccountable Professional Expense Reimbursement Plans


What is the difference between an accountable and nonaccountable professional expense reimbursement plan? If a pastor's church advances him more than his actual expenses, can he keep the excess and simply report it as additional taxable income?


Some churches have set up professional expense reimbursement plans for their pastors that are not in compliance with the Internal Revenue Code. For example, a church includes $100 per month in its budget to advance to the pastor for his ministry expenses. The church requires no substantiation, but assumes the pastor has at least that much in unreimbursed expenses. Therefore, the church does not report theses advances as taxable income. This procedure is incorrect.

Most pastors understand their duty to use these funds for church purposes. Some believe if they do not incur sufficient tax deductible expenses, they are permitted to report the excess advances as taxable income and use the undocumented monies for personal purposes. Revenue Proc. 2019-46 issued effective Nov. 14, 2019, says that these arrangements, which the IRS has titled "Nonaccountable plans," are subject to very different tax treatment than simply reporting the excess as income.

According to Revenue Procedure 2019-46, "an arrangement is not treated as a reimbursement or other expense allowance arrangement if it (1) does not require the employee to substantiate the expenses or (2) allows the employee to retain any amount in excess of the substantiated expenses covered under the arrangement."

If an arrangement fails one of these tests, all the amounts paid under the arrangement are treated as paid under a nonaccounable plan and are included in the employee's gross income, reported as compensation on Form W-2.

Under a nonaccountable arrangement, two consequences arise:
  1. To the church - the church must report the full amount of advances as taxable income on the pastor's Form W-2.
  2. To the pastor - the pastor must report this amount as taxable income with no ability to reduce his taxable income by his legitimate unreimbursed employee business expenses (per the Tax Cut and Jobs Act of 2017). However, the pastor may be able to reduce his self-employment tax obligation.
To avoid these consequences, churches should consider the following two solutions:
  1. Require the pastor to return any unused funds and document all expenses within a reasonable period of time (Internal Revenue Reg. 1.62-2(g)(2)(i) offers a safe harbor of 60 days that will not be disputed by the IRS).
  2. Only cover ministerial expenses on a reimbursement basis, not as an advance allowance. In receiving the proper documentation, then and only then does the church reimburse the pastor.
man writing on paper


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