Question:
Should a church set up a car allowance for its pastor?
Answer:
Any financial assistance that a minster’s employer can give is appreciated. A car allowance can be especially helpful. Car allowances, however, must be established as “accountable plans.” This means that any advances given by the employer to the minster must be properly substantiated on a timely basis or the Internal Revenue Service requires the minster to refund the unspent, undocumented portion of the allowance.
It’s a better idea to offer a professional expense reimbursement under accountable plan rules of the IRS, instead of a car allowance. A reimbursement arrangement covers car expenses, plus other professional expenses. Documentation can then include non-auto costs such as air, travel, lodging, conferences, gifts, books, supplies, and any other legitimate ministry-related expenditure.
The minister documents car expenses when he provides a record of the date, business purpose, and number of miles for each trip. The total miles submitted for reimbursement should then be multiplied by a per mile rate adopted by the church. The IRS sets maximum per mile rates each year that may be used by the church. Rates greater than this may require inclusion of the excess on the minister’s annual Form W-2.
Even though the Internal Revenue Code permits the payment of advances, church funds will be managed more effectively if the church budget establishes an expense category with an annual limit and disburses reimbursements only as documentation is received.
Additional tax-saving opportunities:
1. For 2020, the IRS has set the allowable mileage reimbursement/deductibility rate at 57.5 cents per mile.
2. Ministers who incur unreimbursed employee business expenses may no longer include these costs as itemized deductions on Schedule A. However, ministers may continue to reduce their self-employment taxable income on Schedule SE by their unreimbursed ministry expenses.
3. For a more technical discussion see "Accountable vs. Nonaccountable Professional Expense Reimbursement Plans."
Should a church set up a car allowance for its pastor?
Answer:
Any financial assistance that a minster’s employer can give is appreciated. A car allowance can be especially helpful. Car allowances, however, must be established as “accountable plans.” This means that any advances given by the employer to the minster must be properly substantiated on a timely basis or the Internal Revenue Service requires the minster to refund the unspent, undocumented portion of the allowance.
It’s a better idea to offer a professional expense reimbursement under accountable plan rules of the IRS, instead of a car allowance. A reimbursement arrangement covers car expenses, plus other professional expenses. Documentation can then include non-auto costs such as air, travel, lodging, conferences, gifts, books, supplies, and any other legitimate ministry-related expenditure.
The minister documents car expenses when he provides a record of the date, business purpose, and number of miles for each trip. The total miles submitted for reimbursement should then be multiplied by a per mile rate adopted by the church. The IRS sets maximum per mile rates each year that may be used by the church. Rates greater than this may require inclusion of the excess on the minister’s annual Form W-2.
Even though the Internal Revenue Code permits the payment of advances, church funds will be managed more effectively if the church budget establishes an expense category with an annual limit and disburses reimbursements only as documentation is received.
Additional tax-saving opportunities:
1. For 2020, the IRS has set the allowable mileage reimbursement/deductibility rate at 57.5 cents per mile.
2. Ministers who incur unreimbursed employee business expenses may no longer include these costs as itemized deductions on Schedule A. However, ministers may continue to reduce their self-employment taxable income on Schedule SE by their unreimbursed ministry expenses.
3. For a more technical discussion see "Accountable vs. Nonaccountable Professional Expense Reimbursement Plans."
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