MinistryCPA - Corey A. Pfaffe, CPA, LLC

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: As a minister, I have an office in my home because I do not have an office at the church. I heard there is a simplified method for deducting home office expenses on my 2013 tax return. Is this true? If it is true, is there an advantage to using the new method? Answer: The IRS has provided a safe harbor method for deducting home office expenses. The safe harbor method may be used for tax years beginning on or after January 1, 2013. Similar to the actual-expense method, the safe harbor method only permits a home office deduction if the office is used “regularly and exclusively” for business purposes.   The office must also be for the convenience of the employer. Just because the safe harbor method is available does not mean it is the best option for you. The safe harbor method has advantages and disadvantages. Advantages Utilities, insurance, repairs and maintenance, and other expenses do not need to be tracked. Allowable mortgage interest and real estate ta...

Question: How much can an overseas missionary deduct from income for SE tax purposes for business use of his home? Much of his ministry is one-on-one or else small group Bible studies and takes place in his home living room. Obviously this part of the house is not used exclusively for business purposes. Are you aware of any basis for claiming a larger office in home expense beyond what would be allowed under the "used exclusively" test? Answer: Directly quoted from IRS Topic 509 : "Where the exclusive use requirement applies, you cannot deduct business expenses for any part of your home that you use for both personal and business purposes. For example, if you are an attorney and use the den of your home to write legal briefs and also for personal purposes, you may not deduct any business-use-of-your-home expenses. Further, under the principal-place-of-business test, you must determine that your home is the principal place of your trade or business after consideri...

Question: A pastor receives a Form W-2 from the church reporting his compensation. The church cannot offer him an office at the church so he does most of his studies at home. Can he claim some of the home expenses for his church office? The pastor was told that he could do it if the church gave him a Form 1099 but not if he received a W-2. Answer: Employees (ones who receive Form W-2) are eligible to claim office-in-home deductions on Form 2106 if none is provided by their employers. Independent contractors who receive Form 1099-MISC from their customers may deduct an office-in-home using Form 8829. Some churches erroneously issue Form 1099-MISC to their pastors but this does not prohibit legitimate office in home deductions. The office in home deduction may reduce his income tax by virtue of its inclusion as a miscellaneous itemized deduction (Schedule A); the calculation is determined on Form 2106 and transferred to Schedule A. (The use of a ministerial housing allowance wi...

Question: A self-employed missionary receives a Form 1099-MISC reporting his support income and files Schedule C to claim his earnings and business expenses. The expenses that he can deduct on Schedule C include a long list of typical costs such as business mileage, office supplies, conference fees, and travel and entertainment. He spent $14,000 of his support to build a room attached to his house. The room is used exclusively as a church and ministry center. Is there any provision for him to reduce his income and self-employment tax by reporting a business expense deduction related to business use of his home? Answer: By spending his support to add to his personal residence (a home he owns and not one owned by the church), he will presumably be the ultimate beneficiary of the income since the sale of his home will likely bring greater value than without the addition. Hence, I see no provision to immediately write-off the expense in the year of expenditure. However, since it is a...