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December 10, 2013

Accountable Reimbursements Prove Best Way to Handle Ministry Expenses

Your employees will thank you.

The best way for ministers to handle their ministry-related business expenses is to have their employing church adopt an accountable expense reimbursement arrangement. An accountable arrangement is one that meets the following four requirements: (1) only business expenses are reimbursed; (2) no reimbursement without an adequate accounting of expenses within a reasonable period of time (not more than 60 days after an expense in incurred); (3) any excess reimbursement or allowance must be returned to the employer within a reasonable period of time (not more than 120 days after an excess reimbursement is paid); (4) an employer's reimbursements must come out of the employer's funds and not by reducing the employee's salary. Under an accountable plan, an employee reports to the church rather than to the IRS. The reimbursements are not reported as taxable income to the employee, and the employee does not claim any deductions. This often translates into significant tax savings for the employee.

How to establish an accountable reimbursement arrangement

An accountable reimbursement arrangement should be established by the church board or congregation in an appropriate resolution. In adopting a resolution, pay special attention to the following rules:

  • Condition the reimbursement of any expense on adequate substantiation. This will include written evidence for all expenses and receipts for expenses of $75 or more. For most expenses, the evidence must substantiate the amount, date, place, and business nature of each expense. The key point is this: A church must require the same degree of substantiation as would be required for a deduction on the minister's income tax return.

  • Expenses must be substantiated, and excess reimbursements returned to the church, within a reasonable time. Expenses will be deemed substantiated within a reasonable time if they are substantiated within 60 days. Excess reimbursements will be deemed to be returned to the employer within a reasonable time if they are returned within 120 days.

What about nonbusiness expenses?

Churches occasionally reimburse ministers for nonbusiness expenses. Such reimbursements, though they require an accounting, ordinarily must be included in the minister's wages for income tax reporting purposes, and they are not deductible by the minister. Such personal, living, or family expenses are not deductible, and the entire amount of a church's reimbursement must be reported as taxable income on the minister's Form W-2 and Form 1040.

For a comprehensive explanation on how to handle ministry-related business expenses, pre-order Richard R. Hammar's 2014 Church & Clergy Tax Guide (releasing in January 2014).

Related Tags: income tax, reimbursements, Richard Hammar, W-2

Comments

Does this apply to christian organizations that hire contract workers?

Gus--Yes, an accountable reimbursement plan is an effective approach for nonprofit ministries as well. Contract workers would need to submit the same documentation and information to receive reimbursement for ministry-related expenses.

It is my understanding that with an accountable reimbursement plan the estimated business expense is to be declared and specified in the minister's contract at the beginning of the year. However, can that declared amount be adjusted during the year, if it is determined that the beginning of the year estimate was not accurate?

Gordon--With an accountable reimbursement plan, only actual expenses--not estimated ones--are involved.

"If a church adopts an accountable reimbursement plan, none of the church's reimbursements needs to appear on an employee's Form W-2 (or 1040), and there are no expenses for the employee to deduct. The employee, in effect, accounts to his or her employer rather than to the IRS" and the following four rules must be followed:

1) Expenses must have a business connection.

2) The expenses must be accounted to the employer within a reasonable timeframe (not more than 60 days after the expense is incurred).

3) Any excess reimbursement is returned within 120 days after it is paid.

4) Reimbursements are not made out of salary reductions.

--2013 Church & Clergy Tax Guide, page 332

Our accountable reimbursement plan has an annual maximum for each category. So, for example, if pastor's gas for the year goes over $4800, we plan not to reimburse anything over that amount, but to have him handle the rest as deductions on his personal income tax. Here is my question: Our plan has $1200 for office supplies. Several people buy office supplies. Do we need a plan for each person, or do we just reimburse them all until we get to $1200 ?

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