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.
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.
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.