Don't Lose the Advantages of Your Accountable Reimbursement Plan
The implementation of an Accountable Reimbursement Policy by a church is one of the most important components of a clergy compensation package. Consider the following benefi ts of such a plan:
1. A Minister's Business Expenses Are Reported To The Church Rather Than To The IRS
2. Ministers Avoid The Deductibility Limitations Of Business Expenses. These limitations include (a) the elimination of all business expense deductions if the minister cannot itemize deductions on Schedule A (70% of all taxpayers cannot) and (b) the deductibility of business expenses on Schedule A as an itemized expense only to the extent that these expenses exceed 2% of the minister's adjusted gross income.
3. The Deason Allocation Rule Is Avoided. Under this rule ministers must reduce their business expense deduction by the percentage of their total compensation that consists of a tax-exempt housing allowance. At first glance, there does not seem to be a relationship between housing allowance exclusion and business expense deduction. However, because the minister receives an income tax-free parsonage, valued by most as adding approximately 25% to the compensation package, the IRS has ruled that the same percentage of the incurred business expenses should be attributed to that part of the compensation upon which no tax has been paid. Since that part of the compensation was earned tax-free, there should be no deduction for the business expenses related to it.
4. The "50 Limitation" That Applies To The Deductibility Of Business Meals And Entertainment Expenses Is Avoided. Unless these expenses are reimbursed by an employer under an accountable reimbursement plan, only 50% of the costs are deductible. With an accountable plan the entire 100% is reimbursable.
An Accountable Reimbursement Plan is one that satisfies the following requirements:
(1) The Plan Is in Writing. A plan's not being in writing is one of the major causes for an IRS audit to disallow a church's or minister's reimbursement plan due to its being out of regulation compliance.
(2) It Has a Business Purpose and Relationship. The business connection requirement is met if the plan reimburses employee expenses that could be claimed by the employee as income tax business expense deductions, and that are paid or incurred by the employee in connection with the performance of services as an employee in a business relationship.
(3) There Is Written Substantiation. A reimbursement arrangement meets the substantiation requirement if it requires each business expense to be substantiated to the employer within a reasonable time. The IRS defi nes "reasonable" as "no less frequently than monthly with no reimbursement allowable if substantiation is more than 60 days after the expense is incurred or paid by the employee." Suffi cient written documentation includes date, place, business purpose/relationship and a receipt. The IRS does not require a receipt if the expense is under $75, but the church can set a lower minimum if so desired. IRS regulations specifi cally forbid an employee's accounting to an employer by means of the employee's oral or written statements in lieu of a written receipt from the person or place where the expense took place.
(4) There Is a Return of any Excess Reimbursement. It is permissible for a church to advance money to the minister to meet an expense, but the substantiation of expenses and the return of any excess funds must be made within 120 days.
(5) An Accountable Reimbursement Plan May Not be Accomplished Through a Salary Reduction Agreement. Hopefully, a church would want to pay all of its pastor's legitimate business expenses. However, the church annually may set a total limit as to the amount it will reimburse, and it may put into the written plan a description of what types of expenses it will reimburse. But under no circumstances may the minister be allowed to keep or be given any excess or unused portions of these "reimbursement funds." If either of these situations should take place, the entire year's program would be deemed to be unaccountable. Therefore all reimbursements would have to be included as wages and included on the annual W-2 Form as such.
If your church does not have a written Accountable Reimbursement Policy, check with the District Superintendent. All of Holston's Superintendents have been sent sample copies by the Conference Financial Officer.
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The Clergy Connection is a communication produced and written by the Clergy of Holston Conference for the purposes of deepening relationships, encouraging spiritual growth, increasing awareness of challenging opportunities, imparting useful information, stimulating theological exploration, providing a forum for honest expression and sharing the joys of creative ministries.
The Clergy Connection exists to call clergy into deeper covenant with God through Christ and to call clergy to live in covenant with each other.
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