In my previous article about The Deason Rule, we touched on a method meant as a workaround for money lost when a pastor can’t declare a percentage of their unreimbursed work expenses. In summary, if you’re receiving a housing allowance, then you can’t claim 100% of your unreimbursed work expenses. A way to offset this is by creating an Accountable Reimbursement Plan For Pastors.
What It Does
The aim of an accountable plan is for a church to reimburse a pastor by claiming personal expenses as expenses of the church. These reimbursements are tax-free for the pastor too. It’s important to note that although I mentioned an accountable plan to offset The Deason Rule, they are unrelated in nature. This means you can create an Accountable Reimbursement Plan For Pastors even if you aren’t receiving a housing allowance. The plan is simply a means for pastor to take advantage of regulations set forth by the IRS. It’s also a plan not a lot of pastor or churches know about.
Examples Of Reimbursements
In certain situations, an expense a pastor incurs can be reimbursed by his/her church. But what kinds of expenses? There are a slew of ways a church can reimburse their pastor. This article by LifeWay goes into detail with each type of expense that applies:
You can be reimbursed for conventions, conferences, seminars, and other workshop fees or costs. If the continuing education event furthers the pastor’s learning experience and the educational event does not qualify the pastor for a new position, then the church can reimburse him tax-free for associated costs.
Church-related business travel applies too. The IRS allows the church to reimburse its employees the IRS standard mileage rate plus parking fees and tolls for business miles driven for church-related purposes. The IRS does not allow a church to reimburse its pastor for commuting miles from home to the church no matter how many times the pastor goes back and forth each day. Also, the church can reimburse meals its staff incurs if the required travel takes the pastor away from the church field during meal times.
And then there are costs associated with church-related business overnight trips. The church can reimburse its pastor for lodging, meals, and other costs associated with overnight church-related business travel.
Other Reimbursements
Included are subscriptions, books, tapes, CDs, DVDs, internet, equipment, and similar tools. Sermon resources and other educational material expenses can be reimbursed by the church if the tool has a church-related business connection. Likewise, the church can provide church-related business equipment like PDAs and computers as reimbursable expenses. Under current IRS rulings, cell phones can only be reimbursed if the employee provides a detailed itemized billing of personal and business use of the cell phone. The church can only reimburse the employee for the business portion of the cell phone bill.
Finally, you can be reimbursed for hospitality expenses required by the church to entertain others. The church can reimburse its pastor’s expenses associated with providing a business meal for individuals, like prospects or church members, if the meal had a church-related purpose. The church can reimburse the pastor for entire cost of the meal.
The Reimbursement Process
There are many ways for a church to reimburse a pastor, tax-free. However, there is a right way and a wrong way to go about doing this. The IRS asks that you follow a few simple rules if you’re going to pursue this avenue.
You have to provide the church with a receipt within 60 days of incurring the expense, as long as it’s below $75. If you don’t, then it’s considered taxable income. Your receipt should also include the date, amount, how the business expense is church-related, location, and in the case of a hospitality expense, the names of the individuals hosted.
When the church budgets the fund needed to reimburse the pastor, it needs to be recorded in a similar manner as other expenses like maintenance or utilities. You can’t just reduce the pastor’s salary and call that difference an accountable plan.
Use It Or Lose It
The Accountable Reimbursement Plan For Pastors is a “use it or lose it” approach. If the pastor does not use the entire budget line item designated for reimbursement, he can’t receive the overage. Remember, an accountable plan is a church expense, not personal income to the pastor. Expenses like travel, conventions, hospitality, and others can be grouped together as one budget line item too. The reimbursement expenses don’t have to be budgeted separately.
When it comes to creating the plan, it must be church-approved, but the plan doesn’t have to be voted on by the church at a church conference. If the church’s legal documents give the finance committee or executive staff power over the budgeted funds regarding the accountable plan, then the IRS finds that acceptable. Also, the committee or staff overseeing the plan has the right to determine which receipts are an acceptable expense for reimbursement. The reimbursement must have a church-related business connection. Finally, the church should not report any expenses reimbursed properly under an accountable plan as taxable income on the pastor’s W-2.
In Closing
And that’s all there is to it. The information in this article was a little denser than the one I wrote on The Deason Plan, but if you need any clarification, go ahead and leave a comment below, or contact us at Aplos. In my next blog post, I’ll be talking about housing allowances—the caveat that brought about The Deason Plan in the first place—so go check it out if you want a more rounded understanding. See you there!
Disclaimer: This post is for informational purposes only and isn’t intended to be a substitute for tax advice from a certified professional.
18 comments
[…] Deason Rule, but now you may be wondering about the Accountable Plan and how you can set one up. In my next post, I’ll be going into further detail on the Accountable Plan and how a church can reimburse […]
This is very helpful. Thank you!
I wonder if this applies in the same way for those who are part of a 501(c)3 non-profit ministry team but receive 1099-M income, rather than W-2 income?
Hi there Heidi,
If you’re receiving 1099-M income, it is assumed that this income is separate from work for the church, even if members of the congregation are paying you for ministerial services, like weddings. Because it’s separate, you can’t be reimbursed. The work for your 1099 income shouldn’t be a work expense related to the church, even if, say, the wedding you’re performing at physically takes place there (You’re still getting paid by the wedding party, not them). If the work is in service to the church and they’re paying you, then they need to provide you with a W-2. However, exceptions can be made for employees working more minor roles. Regardless, work expenses related to 1099 work shouldn’t be reimbursed by the church.
I hope this answers your question, and if not, feel free to ask another.
All the information on this blog and in the comments are for informational purposes only and shouldn’t be considered a substitute for professional tax advice.
[…] Deason Rule, but now you may be wondering about the Accountable Plan and how you can set one up. In my next post, I’ll be going into further detail on the Accountable Plan and how a church can reimburse […]
I am a new treasurer for a church which designates a set amount for accountable reimbursement in the budget for the minister each year. I think the pastor will have an amount of excess reimbursement this year because she did not turn in receipts for expenses equal to or more than the amount designated for
reimbursement. My question is in regards to the expenses that she did not turn in for reimbursement.
Does she include that in her Part I of 2106 to reduce the amount of taxable income or does she report
these expenses at all? The church requires the designated amount to be deducted from her amount of
Box 1 income and she is not required to return any excess reimbursement.
Hi, Melanie. Unfortunately, we aren’t allowed to provide tax advice. Does your church have a tax advisor you can reach out to?
If you do not have one, we have some trusted professionals listed on our website here: https://www.aplos.com/find-an-accountant.
[…] Budgeting – is a method of budgeting in which all your church expenses must be justified for each new period. The process of zero-based budgeting starts from a […]
Is it okay to revise the accountable reimbursement plan mid-year if it seems the amount to be reimburse exceeds the amount budgeted? Is it okay to just line in budget for Professional Development instead of naming it Accountable Reimbursement?
So your saying the IRS does not allow a church to reimburse their pastor for travel to and from the church meeting place and home? How is that not considered a business travel expense? That’s where most of his business take place. Almost all such occasions involve ministry related labor – preaching, teaching, counsel, etc. ?
Hi Craig,
There are specific rules for what’s considered business travel expense and what’s deductible to the individual for their taxes. We would recommend consulting the IRS or a tax professional if you would like clarity on this question.
If a minister could deduct driving to church every day, everyone could deduct driving to work every day. Unfortunately, driving to my everyday place of employment isn’t tax deductible!
Our church has an accountable plan for reimbursement to the Pastor. However, the expenses the pastor incurred exceed the limits of the approved accountable plan. Can these excess expense be deducted on the 1040 Schedule C?
[…] Deason Rule, but now you may be wondering about the Accountable Plan and how you can set one up. In my next post, I’ll be going into further detail on the Accountable Plan and how a church can reimburse […]
Can you give your opinion, or is there IRS guidance for this, for what goes with a minister when he moves on? For instance, using an accountable plan, the church pays for equipment as mentioned above, like a camera, tablet, laptop, etc for the minister’s church-related use. Should that equipment belong to the church if the minister leaves, or does it belong to him?
Hoping for an answer to Hayley’s question.
If I am required to go over and above providing meals, but to also provide overnight lodging for a guest for church related purposes (i.e. evangelist or special speaker for an event) in my home (the parsonage), is there a line for that on the Accountable Expense Reimbursement Plan worksheet? How would I determine the dollar amount for that instance? Thanks for your help!
Hi Connie,
It sounds like what you are wanting to do does not follow the typical use of reimbursements since it isn’t a hard cost, but these are unique to every church. If you want to pursue it, we suggest you consult with a professional advisor who can review your reimbursement plan and employee compensation plan with you to go over the specific agreements between you and your church, discuss options, and help you craft a way to approach your church that communicates your concern and financial impact.
Thank you so much for your response!