April 24, 2015

Can I Deduct Travel Costs for a Mission Trip/Vacation?

Question:

How do I determine "significant personal time" when I am on a mission trip? Example: I travel overseas for a mission trip and work one week full-time for the mission. The next week, I explore and vacation in the area. As a charitable contribution, can I deduct any part of my airfare, lodging,  and food during the week I worked? Or have I lost the whole amount because I vacationed?

Answer:

Although the terms "significant personal time" in the question are not given specifically in IRS Publication 526, Charitable Contributions, the publication does describe when traveling costs are deductible for charitable purposes. Here is a quote from page 5 of the publication:
Generally, you can claim a charitable contribution deduction for travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in the travel.
However, the publication went on to say this:
The deduction for travel expenses will not be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense through the trip. However, if you have only nominal duties, or if for significant parts of the trip you do not have any duties (my emphasis), you cannot deduct your travel expenses.
So how does one determine if he or she had "significant parts of the trip" that were spent on personal pleasure? Well, Publication 526 does not give a black and white calculation. However, there are four example situations included in the publication that may help individuals work through the framework of the guideline. We encourage you to click on the link above and read each example.
 
In a quick search of tax resources, we found twenty four different court cases, IRS Revenue Rulings, and private letter rulings pertaining to this matter. Each situation portrayed a different answer depending on the facts and circumstances of each case. Individuals should contact their tax professional for guidance on this matter.

April 23, 2015

Midyear Housing Allowance Increase

Question:

A pastor has requested that the church increase his housing allowance for the rest of the year. Is it permissible for the church to change the pastor's housing allowance midyear?

Answer:

The minister's church or other qualified organization must designate the housing allowance pursuant to official action taken in advance of the payment. The new designation must be made prospectively, not retrospectively. In other words, the pastor can claim the new housing allowance designation only on the remaining pay periods of the year. 

There is often a prorated calculation that must take place when midyear housing allowance changes occur. Here is an example:

For 2015, Pastor Smith's salary is $48,000 ($4,000 per month). Of the $48,000, the church has designated a housing allowance of $12,000 ($1,000 per month). 

In June of 2015, Pastor Smith realizes that his actual housing expenses and the fair rental value of his home will far exceed $12,000 during the calendar year 2015, so he requests that the church increase his housing allowance to $18,000 for the entire year, with prorated calculations to take place on his July-December paychecks. 

Pastor Smith has already received six paychecks (January-June) totaling $24,000, of which $6,000 was designated as housing allowance. However, since the new housing allowance designation is $18,000 for the year, the church needs to prorate the difference of $12,000 ($18,000-$6,000) on the remaining portion of Pastor Smith's monthly paychecks. Since there are six months remaining, the new monthly housing allowance designation would be $2,000 ($12,000 / 6 months). Here is how the July-December paychecks would look for Pastor Smith:

Pastor's Cash Salary                = $ 2,000
Pastor's Housing Allowance      = $ 2,000
Total Monthly Take Home Pay   = $ 4,000  

Things would get less complicated in 2016. If the pastor requests that his housing allowance remain at $18,000, then the church can simply designate $1,500 of housing allowance per month ($18,000 / 12 months). 
  

April 16, 2015

Church Pays for Camp Fee - Is it Taxable?

Question:

Our church pays 100% of registration fees for our pastor staff's children to attend youth camp in the summer. The children of the staff do not have to complete an application to get the full registration scholarship. Staff children are responsible for paying their transportation fee. Would the cost of the camp registration be considered a taxable fringe benefit to the pastor? 

Answer:

Tax-free fringe benefits are so classified based on statutory authority. To our knowledge, there is no statutory authority on this benefit based to be nontaxable.

While the benefit is certainly generous and most likely appreciated by the staff families, the policy's current state leads to taxable income.

If staff members are receiving this benefit similar to other families of the church, however, it may be possible for them to enjoy tax-free assistance. For example, the church could establish a scholarship fund to sponsor children and teens of the church or local community to attend summer camp. Donations could be solicited from the membership and a proper policy could be applied.

March 06, 2015

Line Items of Church Budget


We (MinistryCPA) were recently asked our opinion on the setup of a church's budget.

Question:

A church wants to know if their budget should individually list the compensation of each staff person instead of combining employee salaries/wage for each type of employee that the church employs. For example, the church budget has a line for the pastor, youth minister, church secretary, etc., but then the budget combines all the part-time employees, such as nursery and accompanists. There have been discussions concerning the privacy of the employees, so how detailed should each line item be?

Answer:

In our experience, churches use a wide array of practices when it comes to budget and personnel. One extreme is including each employee's pay--even a breakdown of the compensation package. The opposite extreme is one number on the budget for the total of all the compensation, including benefits, of all the employees. 

We like the approach of developing a budget on a per-program basis. For example, a church could include the compensation of the youth staff and youth pastor in a budget for Total Youth Programs. Each program would still give a single budget for the compensation of each program.

Although we don't suggest listing out each employee's compensation package in complete detail, in most cases (we believe) members of the church should be given the opportunity to see the compensation breakdown if they desire. 

The Apostle Paul reminded the members of the Corinthian church that God had established "that they which preach the gospel should live of the gospel" (1 Corinthians 9:14). Many active members take this as both a corporate and individual responsibility and want to know whether "liveable" compensation is being provided.  

February 26, 2015

In-home Meal and Entertainment Expenses

Question:

A church pastor is wondering how to deduct meal and entertainment expenses when he and his wife host gatherings at their house. Is there a set amount he can deduct for each meal served? Or does he need to deduct the actual costs? 

Answer:

Meal and entertainment expenses are deductible or reimbursable (by the employer) if they are ordinary and necessary and are either directly related to or associated with the pastor's responsibilities. If the pastor is reimbursed by the church, he cannot claim the expenses as a deduction.

Since it is difficult to precisely document the cost of meals served in the home, a reasonable cost per meal is generally allowable. Here is a quote from page 67 of Worth's Income Tax Guide for Ministers, 2012 Edition

A reasonable amount per meal, depending on your actual circumstances and services practices, might vary between $8.00 to $11.00 per meal. Those afternoon meetings with refreshments, or after evening service snacks for the youth group, etc., might vary between $2.50 to $3.50 per snack.

We have generally found that Worth's per meal suggestions are greater than most pastors can justify. Her snack range is more typical. On a pastor's tax return, 50% of the costs of meals while entertaining is deductible.