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Reporting church business expenses

by Crown Financial Ministries
Many ministers spend hundreds and sometimes thousands of dollars each year on church-related business expenses. The substantiation of these expenses must be precise and accurate...

(see Proverbs 20:10) and the return of any excess reimbursements must be handled with professional discretion (see Proverbs 12:17) and in a timely manner—usually within 120 days of the time funds were advanced to cover the expense—according to Internal Revenue Service (IRS) stipulations.

Documenting business expenses

For expenses to be allowed as deductions, ministers must show that they spent the money for legitimate church-related business reasons. To prove they spent the money, ministers generally need to provide documentary evidence that can be confirmed by a third party, such as cancelled checks, purchase receipts, or credit card receipts. If business expenses are paid in cash, receipts are required.

The IRS is usually satisfied if the "five Ws" are posted on the back of receipts and/or cancelled checks: Why (business purpose), Who (names of persons present), What (itemized description), When (date), and Where (location). The use of a church credit card generally constitutes reimbursement of expenses. However, the use of a credit card does not automatically provide substantiation without additional documentation with regard to church business purposes.

Only the portion of business and professional expenses directly attributable to ministers' Schedule C or C-EZ income (self-employment income) should be deducted on Schedule C or C-EZ. The portion of expenses that relate to activities as employees of the church should be deducted on Form 2106 or 2106-EZ.

Travel expenses

Travel expenses usually include transportation, cost of meals, lodging, phone calls, cab fares, and incidental expenses. To deduct travel expenses, ministers must be away from home overnight on church-related business that required a rest stop. If the trip was not overnight, only the transportation costs can be deducted. One hundred percent of ministers'' travel expenses, except meals and entertainment, can be deducted. A percentage (usually 50 percent—see IRS Publications 17 and 463) of meal and entertainment expenses also can be deducted if the expenses are not lavish and extravagant, ministers are away from home overnight, and the expenses were related to church business.

If ministers travel internationally on church-related business and stay seven days or less, the entire airfare and most expenses are deductible. If they stay more than seven days and if more than 25 percent of the time is allocated for personal, expenses for the extra days beyond seven are not deductible and the first seven must be divided between business and personal. Business is deductible, but personal is not. Expenses of spouses and dependents are deductible only if their travel was for a bona fide church business purpose, such as attending a convention or ministerial training school.

Trips to the Holy Land by ministers generally are not deductible (especially if ministers are taking a group on a tourist venture), unless the church required ministers to make the trip to the Holy Land to meet requirements established by the church, the minister received higher education credit for the trip, or the trip is a first trip by a minister to the Holy Land for the purpose of improving his or her ministerial skills.

Travel expenses of missionaries on furlough in America usually are deductible as general travel expenses as long as they can substantiate the expenses. Expenses that are related to reporting to constituents, raising funds to return to their ministry country, and education that would improve their ministry efforts in their field work country usually can be deducted if missionaries' primary residences remain in another country (see IRS Publications 17, 463, 517, and 593).

Auto expenses

If ministers use their automobiles exclusively for church business, which is very rare, 100 percent of the expenses can be deductible. If ministers use their automobiles for personal use, even on occasion, they must keep accurate records to determine what amount of automobile expenses can be allowable deductions.

To determine automobile allowances, ministers can use one of two methods to figure deductions: the standard mileage rate or the actual expense method. Generally ministers should choose the method that gives the greater deduction—with two exceptions. Ministers must use the actual expense method if they have leased cars or if the current tax year is the first year that the car was placed into church business service.

Standard mileage rate. Ministers can take the standard mileage deduction for travel relating to church business (see IRS Publications 17 and 517), but accurate records must be kept. These records must include the date, purpose of the driving, destination, time, odometer reading before and after driving, total number of miles traveled for church business purpose, and name of person driving. Ministers who are employed by the church deduct business miles on Form 2106 or 2106-EZ. Self-employed ministers deduct business miles on Schedule C or C-EZ.

Actual expense method. As with the standard mileage rate, accurate records must be kept if the actual expense method is chosen to determine automobile deductions (see IRS Publication 463). Under the actual expense method, either accelerated or straight-line depreciation of automobiles can be used (leased cars cannot receive a depreciation deduction). In addition, actual expenses such as oil and gas, repairs, maintenance, parts and supplies, insurance, tires, auto club membership, interest on auto loan, lease payments, license plates, and anything else associated with the automobile used for church business can be deducted, if there is corroboration of the expenses. On the receipt must be recorded the date, time, person purchasing, purpose, and the person who authorized the purchase. However, only the percentage of the expense that was actually for church business can be deducted.

Other expenses

There are numerous other allowable miscellaneous and professional expenses that may be deductible. Among these miscellaneous expenses could be charitable contributions as business expenses, clothing, education, non-overnight entertainment, interest expenses, moving expenses, personal computers and cellular telephones, local telephone expenses, long distance, and subscriptions and books. For information regarding what is allowable for ministers for church-related business expenses, we recommend consultation with a qualified tax advisor, a CPA, or the local office of the Internal Revenue Service. Other helpful information can be found in IRS Publications 1, 17, 463, 501, 508, 517, 526, and 533, available through the local IRS office by calling the IRS toll free at (800) 829-3676 or contacting them online at www.irs.ustreas.gov.

Conclusion

Under the existing federal tax code, ministers are treated differently than virtually anybody else in America. They have advantages and disadvantages that no one else has, and often confusion exists concerning clergy compensation, deductions, and expenses. However, some of this confusion can be avoided and unnecessary audits and IRS examinations can be minimized if ministers keep accurate records and report expenses and deductions honestly. "He who walks in his uprightness fears the Lord, but he who is devious in his ways despises Him" (Proverbs 14:2).

by Crown Financial Ministries