MinistryCPA - Corey A. Pfaffe, CPA, LLC

Question: A minister has been using tax preparation software for years. He is paid as a Form 1099-MISC, self-employed pastor. The program sent him to a worksheet which took his Schedule C business expenses and reduced them by a percentage of income attributed to housing allowance. He had never had that happen before. Is there some new regulation or provision in the tax code? Answer: What the minister is dealing with here is something called the Deason Rule, and it is based on a tax case going back to 1964. The rule applies to clergy who are able to take business expense deductions for unreimbursed business expenses. According to the IRS: “A minister may deduct ordinary and necessary business expenses. However, if a minister's compensation includes a parsonage or housing allowance which is exempt from income under IRC § 107, the prorated portion of the expenses allocable to the tax exempt income is not deductible, per IRC § 265, Deason v. Commissioner , 41 T.C. 465 (1964), Dal...

Questions: A missionary is going to be serving with a recognized U.S. missions organization. His home church is willing to receive funds from donors and then disburse them to him. What is the best way for the missionary’s home church to do this? Answer: Once the church has communicated its endorsement of a missionary, it will naturally encourage donors to contribute to his support. The checks to support him need to be made payable to the church and accountable to its control. The church then will disburse the funds. It is strongly recommended that the church dispense the funds directly to the missionary’s mission agency. The agency will handle all tax related issues and the church will have no further reporting requirements. 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. Mariya Bondarenko of Minnesota gets credit for this one.

Question: Are Internal Revenue Code 403(b) distributions (to a minister over the age of 59 ½) that are designated as housing allowance in excess of housings costs subject to self-employment tax, or are they only subject to income tax as regular income? Answer: If a minister owns a home, the amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following: (a) the amount actually used to provide a home, (b) the amount officially designated as a housing allowance, or c) the fair rental value of the home. As with virtually all retirement plan distributions, no self-employment tax is due on 403(b) distributions. 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. Mariya Bondarenko of Minnesota gets credit for this one.

Question: Is there any reason a church could not make deposits to an IRA account for its pastor? It is understood that any deposits would have to be reported as income on Form W-2, but other than that, is there any problem? Also, how much of a monthly contribution would be necessary for a 403(b) to be worth the trouble to set up? Answer: Usually it is the responsibility of the minister to make contributions to his IRA himself and take a deduction when he files his personal returns. However, there is no restriction to assist in payroll deductions for any purpose as long as they are handled correctly on Form W-2 (as is suggested in the Question). Many ministers do not use traditional IRA plans since Internal Revenue Code section 403(b) and Roth IRA plans are available. Self-employment tax is not assessed on contributions to Church Plans (IRS Revenue Rulings 68-395 and 78-6) which it is believed to include 403(b) plans. It is our experience that most investment firms that sponsor...

Question: A church has an associate pastor who is unpaid. He drives 30 miles each direction from his home to the church, 2 to 3 times per week. It has been proposed that a “gift” from the church be made to reimburse his gasoline costs. It appears that any payment to him would be taxable. Is there any exception since he is unpaid for his services to the church, and not actually an employee? If not, can he claim his mileage at the charity rate since he is not a paid employee of the church, but involved in a charitable activity? Answer: Any money that the church gives the associate pastor is considered compensation because he is performing a service to the church. Employees can be reimbursed at $.555 (2012) for business miles, but not for commuting (the apparent case in this situation). If the pastor continues as a volunteer, he could claim his mileage at the $.14 per mile charitable rate (2012). Therefore, if he continues as a volunteer, the church could reimburse him up to $.14 p...

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 ful...

Question: Independent missionaries are occasionally invited to our church for events. For the services provided, they are given honorarium. However, sometimes, the church mission board decides to provide one-time support for the missionary and the money is disbursed from the mission fund. Does this mean that the church has to assume the role of a missionary agency and require accountability and reporting for this sum of money in the following months? Answer: A church that supports an independent missionary will need to issue him or her a Form 1099-MISC at the end of each year, reporting all distributions (assuming they amount to at least $600). This is not necessary for missionaries commissioned by or associated with recognized missions agencies and who receive W–2 or 1099 forms directly from their missions agencies. In order to issue a Form 1099-MISC, a church will need to know the missionary’s address and social security number. This information can be obtained by having...

Question: I am working as a missionary in West Africa and am considered an unordained employee of my missions agency. I receive a Form W-2 each year to file my taxes. This year, while I was on home service, my home church took an extra offering and decided to give it to me as a gift rather than send it to our main office. Is this taxable and, if so, where do I report it on my Form 1040? Answer: Yes, this gift is considered taxable compensation for your services as a missionary. You should report it on a Schedule C as self-employment income. 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. Jeremy Mattson of Green Bay, Wisconsin gets credit for this one.

Question: My church set up an adoption fund to help members that are willing to adopt children. Two of the members that have answered this call are church employees, one is an administrative employee and the other is a pastor. Are funds paid out of this fund taxable to the employee? Answer: Benevolent activities of the church may benefit members of the church or community who are also employees as long as they are not disguised forms of compensation. Benevolent disbursements are not considered taxable income to the recipient since they are not compensation for services rendered to the church. The church should establish clear parameters for eligibility to receive benevolence; employment status with the church must not influence the procedures for receipt of benevolence. 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. Julia Doerstling of Lantana, T...

Question: A church rents space for its ministry from a generous landlord. Is it able to give its landlord an in-kind contribution statement for a portion of its monthly lease? For example, its monthly lease payment is only $4,000 on a property with a fair market rental rate of $5,000. The landlord wants to contribute $1,000 per month for one year. Could the church give him a charitable contributions statement for $12,000? Answer: According to IRS Publication 526, “you cannot deduct the value of your time or services.” Since rent is considered a service, no deduction is permitted. 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. Julia Doerstling of Lantana, Texas contributed to this posting.