Church Mileage Reimbursement of Volunteers

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Question:A church has an associate pastor who is unpaid. He drives30 miles each direction from his home to the church, 2 to 3 times per week. Ithas been proposed that a “gift” from the church be made to reimburse hisgasoline costs. It appears that any payment to him would be taxable. Is thereany exception since he is unpaid for his services to the church, and notactually an employee? If not, can he claim his mileage at the charity ratesince he is not a paid employee of the church, but involved in a charitableactivity?

Answer:Any money that the church gives the associate pastor is consideredcompensation because he is performing a service to the church. Employees can bereimbursed at $.555 (2012) for business miles, but not for commuting (theapparent case in this situation). If the pastor continues as a volunteer, hecould 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 permile without tax consequences. Given an average of 2.5 trips per week, thisequals $21 per week (truly a “token”)!

The members of myFederal Taxation I class at Maranatha Baptist Bible College in Watertown,Wisconsin have taken on the challenge of study and research to answer postedquestions. LeslieHarrison of Michigan gets credit for this one.

Church as Facilitator to Pastor Contributions to a Traditional IRA Account

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Question:

Is there any reason a church could not make deposits to anIRA account for its pastor? It is understood that any deposits would have to bereported 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 beworth the trouble to set up?Answer:

Usually it is the responsibility of the minister to makecontributions to his IRA himself and take a deduction when he files hispersonal returns. But there is no restriction to assist in payroll deductionsfor any purpose as long as they are handled correctly on Form W-2 (as issuggested in the Question). Many ministers do not use traditional IRA planssince 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 isbelieved to include 403(b) plans. It is our experience that most investment firms thatsponsor 403(b) plans require minimum monthly contributions. Fees to establishand to contribute to these plans must be weighed against the tax benefits.

The members of my Federal Taxation I class at MaranathaBaptist Bible College in Watertown, Wisconsin have taken on the challenge ofstudy and research to answer posted questions. Leslie Harrison of Michigan gets creditfor this one.

Housing Allowance Designation of IRC 403(b) Distributions

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Question:

Are Internal Revenue Code 403(b) distributions (to aminister over the age of 59 ½) that are designated as housing allowance inexcess of housings costs subject to self-employment tax, or are they onlysubject to income tax as regular income?

Answer:

If a minister owns a home, the amount excluded from theminister’s gross income as a housing allowance is limited to the least of thefollowing: (a) the amount actually used to provide a home, (b) the amountofficially designated as a housing allowance, or c) the fair rental value ofthe home.

As with virtually all retirement plan distributions, noself-employment tax is due on 403(b) distributions.

The members of my Federal Taxation I class at MaranathaBaptist Bible College in Watertown, Wisconsin have taken on the challenge ofstudy and research to answer posted questions. Mariya Bondarenko of Minnesota getscredit for this one.

Designated Gifts to Church on Behalf of Missionary

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Questions:

A missionary is going to be serving with a recognized U.S.missions’ organization. His home church is willing to receive funds from donorsand then disburse them to him. What is the best way for the missionary’s homechurch to do this?

Answer:

Once the church has communicated its endorsement of amissionary, it will naturally encourage donors to contribute to his support. Thechecks to support him need to be made payable to the church and accountable toits control. The church then will disburse the funds. It is stronglyrecommended that the church dispense the funds directly to the missionary’smission agency. The agency will handle all tax related issues and the churchwill have no further reporting requirements.

The members of my Federal Taxation I class at MaranathaBaptist Bible College in Watertown, Wisconsin have taken on the challenge ofstudy and research to answer posted questions. Mariya Bondarenko of Minnesota getscredit for this one.

The Deason Rule

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Question:

A minister has been using tax preparation software foryears. He is paid as a Form 1099-MISC, self-employed pastor. The program sent himto a worksheet which took his Schedule C business expenses and reduced them bya percentage of income attributed to housing allowance. He had never had thathappen before. Is there some new regulation or provision in the tax code? Answer:

What the minister is dealing with here issomething called the Deason Rule, and it is based on a tax case going back to1964. The rule applies to clergy who are able to take business expense deductionsfor unreimbursed business expenses. According to the IRS: “A minister maydeduct ordinary and necessary business expenses. However, if a minister'scompensation includes a parsonage or housing allowance which is exempt fromincome under IRC § 107, the prorated portion of the expenses allocable to thetax exempt income is not deductible, per IRC § 265, Deason v. Commissioner, 41 T.C. 465 (1964), Dalan v. Commissioner,T.C. Memo. 1988-106, and McFarlandv. Commissioner , T.C. Memo. 1992-440.”

Thereis a way that will help the pastor get out of the Deason Rule, and it is byhaving the church set up an Accountable Plan for his professionalclergy expenses. Under such an arrangement, the church establishes part ofits minister’s compensation package for ministry expenses. The minister isreimbursed for those expenses. By doing this, the pastor will not haveunreimbursed expenses that will be of limited tax benefit. Hint: This would bea good time to use this blog’s search window to find and review Accountable Plans.
The members of my Federal Taxation I class at MaranathaBaptist Bible College in Watertown, Wisconsin have taken on the challenge ofstudy and research to answer posted questions. Mariya Bondarenko of Minnesota getscredit for this one.