Prior to the Tax Cuts and Jobs Act, which went into effect, January 1, 2018, unreimbursed ministry-related expenses were generally deductible on the minister’s individual tax return as a miscellaneous itemized deduction (Schedule A) if they exceeded 2% of an individual’s AGI. Starting in 2018, these deductions will be eliminated for tax years through 2025. This includes unreimbursed ministry-related expenses such as:
- Mileage cost;
- Travel expenses (excluding commuting);
- Local lodging expenses;
- Ministry professional expenses;
- Ministry meal and entertainment expenses;
- Ministry tools and supplies;
- Required uniforms not suitable for ordinary wear;
- Dues, Books, and subscriptions;
- Job search expenses.
There are a number of items that will need to be clarified by the IRS prior to next tax season.
Churches should keep in mind that ministers will no longer be able to deduct ministry-related expenses on their 2018 tax returns. To avoid surprises at the end of the year, it will be important to have a reimbursement policy in place to reimburse them throughout the year.
The only possible remedy for the loss of this deduction is for a minister to negotiate an “accountable plan” with the church. To be an accountable plan, the following four conditions must be met: (1) the church must have a written plan (2) the expenses covered under the plan must be ministry related; (3) ministers must be required by the plan to substantiate the covered expenses; and (4) if ministers receive advances, the plan must require them to return any amounts in excess of their substantiated expenses.
An accountable plan is a formal arrangement to advance, reimburse or provide allowances for ministry expenses. Commonly this is accomplished through the use of expense reports and submission of receipts for reimbursement. Along with each receipt, ministers should document the following on an expense report.
- The ministry relationship to the person involved (Who)
- The type or category of the expense (What)
- The time and place of the expense (When, Where)
- The ministry purpose of the expense (Why)
If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the minister, subject to income taxes and self employment tax (SECA).
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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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