Church employees may incur a number of legitimate business expenses in the completion of their duties. These expenses may include travel costs, mileage driven, business meals, subscriptions to ministry periodicals, home office equipment, education related to business, mobile phone charges, and entertainment costs. While the precise details of what does and does not qualify as legitimate business expenses are beyond the scope of this post, a tax professional can assist in making those determinations.
Utilization of an Accountable Plan is the key best practice for a church to reimburse business expenses paid by its employees as part of the performance of their ministry duties. The Accountable Plan protects both the church and its employees from making payments with unintended tax consequences, and ensures that business expenses are properly documented and reported. Though an Accountable Plan is easy to set up, it is an often-overlooked detail.
Without setting up an Accountable Plan, it is very likely that any reimbursed business expenses will qualify as taxable income under current tax law. Gone are the days of itemizing all ministry-related business expenses on a personal tax return.
However, if a church properly sets up an Accountable Plan, it may then reimburse its employees for qualifying business expenses without any need to report those payments as income on the employee’s Form W2. This huge tax advantage makes the proper adoption and use of an Accountable Plan of utmost importance.
The church’s governing board must officially adopt an Accountable Plan for such expense reimbursements to be possible without tax consequence to the church employees. Though it is advisable to consult a tax professional to determine the exact contents of a specific church’s Accountable Plan, the following are the basic components that should be included.
First, the Accountable Plan should provide that any reimbursed expenses must be connected to a legitimate business purpose.
Second, the Accountable Plan should require that the employee provide an adequate accounting of the business expenses. Each expense should be reported within 60 days of the date it was incurred, and adequate documentation should be submitted to show that the expense was incurred for a proper purpose. A receipt is required for any expense in excess of $75.00.
Third, the Accountable Plan should require that any expense reimbursements that are in excess of legitimate business purposes be returned to the church within 120 days.
The policy may allow for the use of a church credit card for charging business expenses. However, even when credit cards are utilized by church employees, proper documentation of expenses must be provided by the employee within 60 days of the incurrence of an expense.
Expense reporting apps can also be utilized as helpful tools in ensuring expenses are adequately documented and reported before reimbursement. Phone apps allow the employee to take a photo image of the expense receipt, ensuring that proper documentation is preserved for each expense. The app then allows the employee to produce a periodic report of expenses prior to reimbursement.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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