Trap #5 Business Expense Reimbursements

Jun 29, 12 • NewsNo Comments

One of the biggest pains in the neck for church administrators is managing expenses incurred by employees (primarily ministers) on behalf of their church. Many ministers are very good about asking for the reimbursement but very deficient in sticking to accountability requirements. In spite of knowing that expenses reimbursed without accountability MUST be reported as income, to avoid paperwork some ministers will simply tell the administrator to “Put it on my W-2 and I will deduct the expenses myself.” For several reasons this makes no economic sense.

If a married minister has itemized deductions less than the Standard Deduction amount of $11,900 he will get no deduction to offset the additional income.

But, even if a minister does itemize, he will get to deduct an amount nowhere near the total of his business expenses because:

  • Miscellaneous Itemized Deductions (which include business expenses) must be reduced by 2% of his income.
  • Any of his payments for meals and entertainment must be reduced by 50%
  • The Deason Rule must be applied which reduces business expenses by the ratio of the housing allowance received to total compensation.

The best economic course for the minister is to give in and submit to an “accountable reimbursement plan”.  If only he will, all business expense reimbursed will be totally excluded from taxable income.  In other words his “deduction” will be 100%!

In order to take advantage of this an accountable reimbursement plan must at a minimum:

  • Be in writing
  • Require adequate documentation of the business purpose of the expenditure
  • Require substantiation within 60 days of the expenditure
  • Require excess advances to be returned within 120 days
  • Not allow advances to be made more than 30 days in advance of the event

Overlooked danger zone – Automatic excess benefits

If reimbursements are made to a senior minister, officer or director of the church and NOT included in the individual’s W-2 income, Intermediate Sanctions (Mentioned in the previous post) may be assessed.  The IRS deems these transactions as “Automatic Excess Benefits”.   

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