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• Accountable Reimbursement Plan Most ministers have professional and business expenses that can legitimately be reimbursed by the church. These include, but are not limited to, auto and travel expenses, books and periodicals, dues, entertainment, convention and seminar expense and vestments (not suits but robes). Many church congregations wish to reimburse their minister for some or all of these expenses and in fact many are doing so. However, in some, if not many instances, this reimbursement is being made under what the Internal Revenue considers a “Non-accountable Reimbursement Plan” and thus the reimbursements become taxable income to the minister. A church that reimburses its minister’s business and/or professional expense without adopting a specific resolution authorizing such reimbursement and without requiring substantiation of those expenses and receipts for any expense over $75.00 or which does not reimburse the expenses in a timely manner, i.e. within 60 days of the date of the expense, is reimbursing under a non-accountable plan, and must add these expense reimbursements to the minister’s W-2 as taxable income. Also, it is not proper, under IRS rules, to fund reimbursement of business expense by “Salary Reduction”, or “Salary restructuring”. Thus the common practice of merely designating a part of the minister’s salary as “auto allowance” or “expense reimbursement” is no longer acceptable. This practice is not illegal, it is simply not “accountable” and results in these designated amounts being taxable income for the minister. Some ministers file tax returns as being “self-employed” and deduct unreimbursed business expenses or expenses reimbursed under a non-accountable plan on “schedule C”. The problem with this is that most ministers, especially those who serve as pastors are considered, by the IRS, to be employees for income tax purposes. In the case of pastors who receive reimbursement of expenses that fact will be used as evidence that the minister is, in fact, an employee. There have been a few instances recently where audits of clergy tax returns have resulted in a reclassification of the minister from “self-employed” to “employee” status with a loss of all the business expense deductions. A minister can deduct unreimbursed business expense or expenses paid under a non-accountable plan on Form 1040 Schedule A. However, only about twenty percent of all taxpayers, including ministers, have sufficient deductions to warrant filing in this manner. Also business expenses can be deducted on schedule A only to the extent that they exceed 2% of adjusted gross income, and are subject to the “deacon” rule (1) which further reduces the amount deductible if the minister receives a tax-free housing allowance. These problems, and others not mentioned here, can be avoided if the church will establish an “Accountable Reimbursement Policy”. How is this done? Below is a link to a sample draft of a “Fully Accountable Reimbursement Plan Resolution”. This resolution or one containing similar provisions must be adopted by the Church Board (Council) of the employing church. Following the adoption of this resolution the minister submits, in accordance with the provisions of the resolution, records of expenses. The church reimburses those expenses. This reimbursement is not reported on the minister’s W-2 as taxable income. For a church that places a limit on the total amount of expense that will be reimbursed, the resolution may contain wording, which authorizes the reimbursement “up to” the amount of the limit agreed upon. The most serious problem associated with this approach to reimbursement of expenses is that it will be viewed as a “pay increase” for the minister. And, in fact, it will be such in many cases where the minister has been paying his own business expense or such expenses have been paid by “salary reduction”. The solution to this problem is difficult, particularly for a church that wishes to take action during the course of the year when salary amounts have already been established and are being paid. Any action which would take a portion of the money, up to this point designated as salary, and shift it to another budget item to reimburse expenses would be considered to be reimbursing expenses either through “salary reduction” or through “salary restructuring”. There should be no problem for the church board to determine the minister’s total compensation for the new year and then to allocate, in separate and unrelated action, the total compensation to reflect one amount as being salary and another amount as a reimbursement account. One thing that must be remembered is that money set aside in an account for reimbursement of expenses always belongs to the church. If in any year these funds are not used to reimburse expenses they cannot be given to the pastor as extra salary or as a bonus or the entire amount designated for accountable reimbursement becomes taxable for income and social security purposes. It is very important that any action setting up this reimbursement account be, in the minutes of the church board meeting, completely unrelated to the amount paid as salary and without any indication or inference that the reimbursement account is being funded out of what would otherwise be the minister’s salary. For a church that did not take this action when the total compensation package of the pastor for the year was established, there is little action that can be taken other than to simply adopt the resolution and reimburse the minister’s expenses in addition to the agreed upon salary and do so up to a stated limit if such limit is desired. In a case where the church has simply designated a part of the pastor’s total compensation package as a weekly or monthly “auto allowance” but where no “accountable reimbursement resolution” was adopted, such “auto allowance” given up to this point must be considered as taxable income. Even if it is too late to take action allowing “accountable” reimbursement of the minister business expense for this year, action should be taken to ensure that such an “accountable” plan could be instituted at the beginning of a new year. All business/professional expense reimbursements (auto, travel, entertainment, etc.) must be paid under an "Accountable Reimbursement Plan" which has been adopted by the church board/council. Any reimbursements paid under a "non‑accountable" plan must be reported as taxable income to the pastor. [1](1)The “deacon rule” states that a minister who receives a housing allowance must reduce the amount of his deductible business and professions expenses by the same percentage that his housing allowance is of his gross salary. This rule does not apply to expenses reimbursed under an accountable plan. |