Several pastors are finding that a few tax laws are impacting their 2018 tax returns. This article is intended to highlight a few issues and offer a few insights that may be helpful. Please discuss them with your tax professional.
The new tax laws give the appearance that the ability for licensed ministers to write off unreimbursed business expenses has been eliminated because they can’t use a schedule C.
However, pastors are still able to deduct those expenses from their self-employment taxes without a Schedule C. They do so on Schedule SE – line 2 by deducting those amounts from the income reported on line 2 and attaching an explanation. This reduces their self-employment tax liability for 2018. Pastors are not required to complete any other forms to include such amounts, but the expenses are still limited by the same deductibility definitions found on the Schedule C.
There are two other options available that essentially provide a positive income tax benefit for these same expenses in 2019.
Option 1: A church can simply begin to reimburse a pastor for what was previously unreimbursed business expenses…meals, mileage, travel, conferences costs, books, etc. These reimbursements are not taxable to the pastor. Setting a budget limit for them is common. And creating a reimbursement request process is required.
Option 2: For a church that cannot afford to bless a pastor with Option 1…
Similar to a housing allowance, pastors can request the church reduce their compensation by an amount individually predetermined and create an expense reimbursement fund with it. Again, creating a reimbursement request process is required. In order for this fund to properly abide by the tax laws, any unused (unreimbursed) amounts at the end of the year ARE FORFIETED. This ‘Use It or Lose It” requirement is very different than the way a housing allowance operates.
CAUTION – If a church simply decides to pay/gift/etc. any unused amounts at yearend rather than forfeiture, the entire predetermined fund technically becomes taxable to the pastor in an audit.
- John estimates/calculates that for 2019 his mileage, business meals, books, conferences, travel, etc. will be approximate $3,000.
- John requests that the church reduce his salary for 2019 by $3,000 and set aside up to $3,000 for reimbursement of his expenses.
- John submits requests for reimbursement including receipts throughout the year for qualified expenditures and/or submits requests (a log format) for mileage reimbursement.
- The church reimburses him for amounts that accumulate up to his predetermined allowance.
If at the end of the year,
- John hasn’t used all the funds he forfeits them.
- He receives payment for amounts that should be forfeited he loses the entire tax benefit established because the entire reimbursement fund now becomes taxable.