MinistryCPA - Corey A. Pfaffe, CPA, LLC

New ministers frequently have several questions as they enter a new field that has significantly different rules than the standard employee of a business has. We have assembled a list of some of the most important questions that a new minister should investigate when starting their new job.  1. How can I live within my means? You need a budget. Enjoying a long-term ministry in Christian service requires an ability to live within your means. Lots of tools are available: Christian authors with “how to” instructions and online apps, to name a couple. Try You Need a Budget (www.ynab.com), if you need an idea. 2. What does it mean to be a dual status employee? A minister, per IRS regulations, is both an employee and self-employed—dual status. As an employee, a minister is eligible for all fringe benefits offered to non-minister employees — health coverage, retirement plans and so on. The exception lies in social security and Medicare tax. Non-minister employees must have 7.65% of thei...

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 mi...

Question: 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? Answer: 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...

Question: A church is sending a married couple on an unpaid short-term missions trip overseas. The congregation has expressed interest in supporting them during their trip. What is the best method to support this couple? Answer: Let us offer two options for consideration. First, the congregation gives directly to the church and designates that the amount goes toward the couple's mission trip. Over time, this fund would accumulate and then be given to the couple before leaving for their trip. This method would require preparation and filing of a Form 1099-MISC at the end of the year. The second option to consider is likely the better of the two. While the couple is on their mission trip, they will submit records of their expenses to the church and be reimbursed for that amount out of the same fund that is designated for them - likely a "Special Projects-Missions Fund" of some sort. Unlike the first method mentioned, this would not require a filing of Form 1099-MI...

Question : A ministry offers an allowance on books and other study aides to assist its pastor in his teaching and preaching. If the pastor maintains ownership of these materials rather than the church, do these amounts become taxable to him as additional compensation? Answer : We believe that a s long as the books and other similar supplies are related to his ministry rather than for his personal recreation, they are not taxable and he may maintain ownership without tax consequences. Presumably he and the congregation have gained the ministry benefit for which they were purchased. On the other hand, if he were to purchase books for recreation purposes (i.e., hobbies such as hunting, exercising, etc.), we would advise him to not use the church's reimbursement account.  It is important to understand the presumption that the ministry-related books are expendable supplies incurred in support of employee activity and have negligible or reduced value in used condition. Additional...

On December 13, 2016, President Obama signed the 21st Century Cures Act, allowing qualified small employers to offer Health Reimbursement Arrangements (HRA) that follow certain terms. After the Affordable Care Act was passed, the IRS originally determined that an HRA was not a qualified group health plan. The Cures Act overrules this decision. HRAs are again an option for qualifying small employers. To be eligible, the small employer must have fewer than 50 employees and must not offer a group health plan to any of its employees. The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) must be subject to the following terms. No salary reduction contributions may be made (i.e., 100% employer-funded). Employer must receive proof of employee’s minimum essential coverage. Reimbursements must be for qualifying medical expenses. Reimbursements for any year cannot exceed $4,950 (or $10,000 for family coverage), which will be adjusted annually for inflation. Employer ...

The IRS issued 2017 standard mileage rates. These rates begin on January 1, 2017. The rates apply to the use of a car, van, pickup or panel truck. 53.5 cents per mile for business miles driven (down from 54 cents for 2016) 17 cents per mile driven for medical or moving purposes (down from 19 cents for 2016) 14 cents per mile driven in service of charitable organizations (no change from 2016) More information is available on the IRS’s webpage .

Question: A church group went on a two-week mission trip, and a few of the members stayed an additional two weeks for personal time. Will the members who stayed the two additional weeks be able to deduct expenses from the trip? Answer: IRS Pub 526 covers the topic of Charitable Contributions and, more specifically, travel expenses associated with charitable trips. The publication states that travel expenses will be deductible “if there is no significant element of personal pleasure, recreation, or vacation in the travel.” The publication also states, “The deduction for travel expenses won't be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you don't have any duties, you can't dedu...

Question: A missionary is doing mission work for less than one year away from his tax home.  1.) Is he considered to be on a business trip the whole duration of the trip? 2.) What deductions is he able to take? 3.) May a self-employed person use the standard meal allowance? Answer: In this situation, the missionary is considered to be on a business trip/temporary assignment according in to IRS Publication 463 . On page 4 the publication states, “Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less."  One must then consider what expenses are allowable as deductions for a temporary assignment. Pub 463 states, “You can deduct ordinary and necessary expenses you have when you travel away from home on business. The type of expense you can deduct depends on the facts and your circumstances.” Table 1-1 in the publication provides a quick summary of deductible business expens...

The IRS issued the 2016 standard mileage rates. These rates for the use of a car (also vans, pickups or panel trucks) begin on January 1, 2016. 54 cents per mile for business miles driven, down from 57.5 cents for 2015 19 cents per mile driven for medical or moving purposes, down from 23 cents for 2015 14 cents per mile driven in service of charitable organizations More information is available on the IRS’s webpage .

Question: I am a missionary overseas. I do not have an office at church, but I use a portion of my home as an office. What are the requirements for an Office in Home deduction? Answer: A home office qualifies for a deduction if the space is used “exclusively and regularly as your principal place of business” according to IRS Publication 587 . In order to fulfill the exclusive use test, the office area must be limited to a separate and recognizable area that is limited only by business use. For example, if your wife and children use a desk in the corner of the living room for homeschooling and you use the same desk for ministry work, the entire living room office space is disqualified from the deduction since you partake in both personal and business use in the area. In order to fulfill the regular use test, the office space must be used on a consistent, regular basis. If the space is used only occasionally, it is disqualified from the deduction. However, if the desk and additi...

Question: Our church pays 100% of registration fees for our pastor staff's children to attend youth camp in the summer. The children of the staff do not have to complete an application to get the full registration scholarship. Staff children are responsible for paying their transportation fee. Would the cost of the camp registration be considered a taxable fringe benefit to the pastor?  Answer: Tax-free fringe benefits are so classified based on statutory authority. To our knowledge, there is no statutory authority on this benefit based to be nontaxable. While the benefit is certainly generous and most likely appreciated by the staff families, the policy's current state leads to taxable income. If staff members are receiving this benefit similar to other families of the church, however, it may be possible for them to enjoy tax-free assistance. For example, the church could establish a scholarship fund to sponsor children and teens of the church or local community to a...

Question: A church pastor is wondering how to deduct meal and entertainment expenses when he and his wife host gatherings at their house. Is there a set amount he can deduct for each meal served? Or does he need to deduct the actual costs?  Answer: Meal and entertainment expenses are deductible or reimbursable (by the employer) if they are ordinary and necessary and are either directly related to or associated with the pastor's responsibilities. If the pastor is reimbursed by the church, he cannot claim the expenses as a deduction. Since it is difficult to precisely document the cost of meals served in the home, a reasonable cost per meal is generally allowable. Here is a quote from page 67 of Worth's Income Tax Guide for Ministers, 2012 Edition :  A reasonable amount per meal, depending on your actual circumstances and services practices, might vary between $8.00 to $11.00 per meal. Those afternoon meetings with refreshments, or after evening service snacks for th...

Yesterday, the Internal Revenue Service issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.   Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup or panel truck will be: 57.5 cents per mile for business miles driven, up from 56 cents in 2014 23 cents per mile driven for medical or moving purposes, down half a cent from 2014  14 cents per mile driven in service of charitable organizations The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law. Taxpayers always have the option of claiming deductions based on the actual costs of u...

Question: I am a minister and I have lived in a parsonage for 40 years. I hope to retire soon and travel around as a non-paid volunteer to assist small churches in rural areas.  I am considering buying a motorhome (or RV). Can a motorhome qualify as a principal place of residence? Answer: Many individuals who own a motorhome ask this similar question: "Can my motorhome count as my second home?" The reason people ask this question is because there are tax benefits to claiming a motorhome as a second (or only) home. For example, the interest on a loan for the motorhome can qualify as a tax deduction, and an individual may be able to deduct a portion of the sales tax paid on a new motorhome. Also, some states allow a portion of the RV's vehicle registration to be deducted.  There are a few basic requirements that must be met to claim a motorhome as a second (or only) home. For example, it must have on-board permanently mounted sleeping, eating, and bathroom facilit...

Question: One of our pastors recently upgraded his iPhone and submitted for reimbursement through a professional account. Is it proper for the church to refund him fully as a non-taxable reimbursement?  Answer: The italicized excerpt below is taken from IRS Publication 15-B . We have added some of our own comments, which are in parenthesis and underlined.  The value of an employer-provided cell phone, provided primarily  for noncompensatory business reasons, is excludable from an employee's income as a working condition fringe benefit. Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a de minimis (non-taxable) fringe benefit.   Noncompensatory business purposes. You provide a cell phone primarily for noncompensatory business purposes (the cell phone should not be a disguised way to give the pastor more compensation) if there are s...

Question: A church has an accountable plan in place to reimburse its minister for business expenses. Unfortunately, the church often does not have the funds available to reimburse its minister at the end of the year. How can it address this issue? Answer: The easy answer for the church is to simply reimburse as much as possible; the minister could then deduct any unreimbursed expenses on Form 2106 for federal tax purposes. However, there are two difficulties for the minister in this scenario: Unreimbursed business expenses for an employee can only be deducted on Form 2106, which flows through to Schedule A . Schedule A deductions only benefit a taxpayer who itemizes rather than taking advantage of the standard deduction. Also, unreimbursed business expenses are only deductible to the extent they exceed 2% of the taxpayer's adjusted gross income (AGI). For instance, a taxpayer with $50,000 of wages and no other deductions would have an AGI of $50,000, and could only d...

Question: As an executive at a mission agency, I am working on a doctorate. In 2013, I incurred $1,200 of qualified education expenses (tuition, fees, and books). My employer paid these education expenses directly as part of an educational assistance program. Can I claim any kind of education credit or deduction for these expenses? Answer: Unfortunately, no. According to IRS Publication 970 , " You cannot use any of the tax-free education expenses paid for by your employer as the basis for any deduction or credit, including the American opportunity credit and lifetime learning credit." Generally, "Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution" ( irs.gov ). Qualified expenses paid by an individual may be eligible for tax deductions or credits.

Question: I am a missionary in a restricted country, and a large part of my ministry is providing humanitarian and medical aid to individuals. I receive my financial support directly from my church, which issues me a Form 1099-MISC. Can I deduct my humanitarian aid expenses for income and self-employment tax purposes? I have considered using the Schedule C gift deduction, but the $25 per-client limit on deductions is highly restrictive. Also, the nature of the expenses does not seem to fit the IRS guidelines for business gifts. Answer: Since IRS Publications do not address every possible category of deductible expenses, general principles must be applied in this situation.  IRS Publication 535  describes allowable business deductions: "To be deductible, a business expense must be  both ordinary and necessary. An ordinary expense  is one that is common and accepted in  your industry. A necessary expense is one that  is helpful and appropriate for your tra...

Question: Are reimbursements for gifts of a non-religious or benevolent nature allowed under an accountable reimbursement plan for a church? For example, could a pastor who purchases flashlights for the members of a Sunday School class be reimbursed? Answer: Gifts are a normal business expense, and are clearly addressed by IRS Publication 463: "If you give gifts in the course of your trade or business, you can deduct all or part of the cost." As such, they are allowable as expenses to be reimbursed if they satisfy the requirements of that publication. However, according to the publication, "You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year." For more details, see   IRS Publication 463 .