MinistryCPA - Corey A. Pfaffe, CPA, LLC

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: As a pastor, what are my retirement options and what are the advantages/disadvantages of each? Answer: The best retirement plan option for each minister depends on his objectives and his current tax situation. The three most common retirement plan options used by ministers include: (a) Internal Revenue Code 403(b) plans (also called Tax Sheltered Annuities (TSAs)) (b) Traditional Individual Retirement Accounts (IRAs), and (c) Roth IRAs  Ministers often select 403(b) plans when they want to maximize their eligible contributions, or to reduce their self-employment tax burden. For the year 2020, a minister may elect to have his employer withhold (“elective deferral”) up to $19,500 of his compensation and contribute it; instead, to his 403(b) qualified investment account. Ministers who are 50 and older are eligible to increase this amount by another $6,500 to catch-up for earlier years’ smaller deferrals ( IRS Publication 571 ). In addition, unlike...

Question: As a pastor, what can I deduct for a housing (parsonage) allowance? Answer: A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. A minister living in a parsonage qualifies for a housing allowance to the extent of his own out-of-pocket cost s.  The IRS lists only food and servants as prohibitions to allowable housing expenses. The minister’s church or other qualified organization (e.g. religious school or college with board members accountable to local churches) must designate the housing allowance by official action taken in advance of the payment. If none of the minister's salary has been officially designated as housing allowance, the full salary must be included in gross income.  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 three amounts: (a) the amount actuall...

On December 20, 2019 President Trump signed the SECURE Act ( Setting Every Community Up for Retirement Enhancement Act of 2019 ). Effective January 1, 2020, two widely applicable changes to Individual Retirement Accounts (IRAs) have been made: 1)       Seniors turning 70½ in 2020, can now wait until the year they turn 72 years old before being forced to take taxable money out of their IRA and other retirement investments. These are called RMDs (Required Minimum Distributions). 2)       Beginning in 2020, seniors can continue to make deductible contributions to their IRA accounts as long as they’re still working and receiving earned income. Before 2020, taxpayer who turned 70½ lost their right to deduct contributions to IRAs even though they were still working.

Question:  As a pastor, am I an employee of the church or am I self-employed? Answer: The answer is "yes" to both. Most ministers are considered employees in every respect except for the purposes of paying self-employment tax (SECA), which includes Medicare and Social Security tax. This means that they are eligible for virtually all employee benefits that are given favorable tax treatment in the Internal Revenue Code. Many of these benefits are unavailable to the typical self-employed individual. Ministers are not permitted to have employee Social Security and Medicare (FICA) withheld and matched by the church. Ministers who have not been granted exemption from SECA tax must pay the entire 15.3% of self-employment tax. Many churches provide additional funds to assist their ministers in the payment of this tax, but this additional compensation, while very helpful, is subject to both income and self-employment tax. Itinerant evangelists are a common example of minist...

How do we count our blessings at year end?            As Certified Public Accountant and founder of MinistryCPA, I challenge us with lessons in counting our blessings at year end that I find I must revisit each December. The missions of more than 100 MinistryCPA charity clients constantly serve to re-center my thinking. Thankfully, early in my career I started a year end pattern of looking back on the past 12 months and looking forward to the next. In addition to the natural reflections you might expect, charitable giving is on my mind. It wasn’t until I was well into my 40s that my vision for giving was expanded beyond simply giving because of a sense of duty. Now I’m much more careful to check and recheck my motivations. 1.        We give because we care about the impact of charities       Giving Tuesday, each Tuesday after Thanksgiving in the U.S., is past. But our favorite charity is still counting on us...

With recent law changes, the federal standard deduction now exceeds $12,000 for individuals and $24,000 for married couples filing jointly and grows each year with inflation adjustments. With only mortgage interest, state and local taxes, catastrophic medical expenses, and charitable contribution deductions to accumulate, many families and individuals face a seemingly insurmountable wall to exceed the "free" standard deduction and, instead, itemize their own write offs.  Some have even questioned whether charitable contributions are deductible anymore; however, all is not lost! MinistryCPA offers four strategies for you to consider as the 2019 calendar year comes to a close. 1. Many state income tax returns do not follow the federal itemized deduction rules. This allows taxpayers to continue gaining a tax benefit for charitable contributions. For example, a Wisconsin taxpayer with $50,000 of Wisconsin income is granted a standard deduction of $6,709 (married filing ...

Question: Could a church borrow from church members at a 0% interest rate? Do “imputed interest” rules apply to such loans? Is there any limitation that a church member needs to be aware of before loaning funds to the church under these conditions? Answer: To answer the first question, yes, a church could receive loans from church members with a 0% interest rate. This type of loan is usually classified as a below-market gift loan. In a sense, the church member who is lending the money is transferring an annual amount equal to the forgone interest to the church as a gift. The church, however, simultaneously transfers such interest back to the lender. This is the idea of imputed interest. Were it not for limitations related to Schedule A itemized deductions, a donor would report equal amounts of the foregone interest as taxable interest income, but enjoy offsetting charitable contribution deduction. However, an exception to this unfortunate consequence does exist.  Accordi...

Question: If I can make retirement contributions to both a Traditional IRA and to a church plan is there a reason to prefer one over the other? Answer: Yes! Most ministers should likely be choosing a 403(b) church plan. In addition to a Traditional IRA, a minister may choose to claim a contribution to another retirement plan, like a 403(b) church plan. However, before choosing to do so, it is important to understand the benefits and disadvantages of both a Traditional IRA and a 403(b) plan. Contributions to a Traditional Individual Retirement Account are not employer plans that are deducted up front from a minister's pay (reported on Form W-2). Instead, these amounts are truly deducted on his personal tax return. The benefit of the IRA is that it can be funded after December 31 st and still count against one's taxable income. Additionally, an IRA does not require church sponsorship and has lower fees to establish an account. While there are several benefits of ...