New Tax Rules for Ministry Expenses
New Tax Rules for Ministers’ Ministry/Business Expenses
Most ministry tax benefits like housing allowance haven’t been impacted by the new legislation. However, miscellaneous itemized deductions are disallowed beginning in 2018 for income tax deductions. This could be significant for some ministers so it’s important to review how you’re handling business/ministry expenses. An accountable plan has always been the recommended way for ministers to account for business expenses for a variety of reasons. Now more than ever, it may play an even more critical role for ministries and non-profits going forward.
With that said, there is still a lot of speculation about business expenses and how the new Tax Legislation will be interpreted by the IRS. Few tax commentaries agree how to account for them now in 2018 and some avoid this issue altogether. We feel this issue may be significant and wish to give our ministers a ‘heads up.’ Until clear interpretations are revealed by the appropriate authorities, no one can definitively say how these new regulations will be interpreted and practiced. Given the lack of official clarity, we offer two options to account for business expenses with the pros and cons below for churches and nonprofits to consider as we wait for more specific IRS guidance.
Here is what we know while waiting for IRS to issue guidance.
- Miscellaneous itemized deductions (including ministry business expenses) have been disallowed.
- The only option for employee ministers to receive income tax benefits for their ministry expenses is an accountable plan or direct payment from the employer.
- Meals incurred in connection with overnight travel expenses are deductible and can be reimbursed tax-free with proper substantiation.
- All entertainment expenses that are “directly” or “associated” with the minister’s trade or profession have been repealed.
- The IRS has issued no guidelines on how they intend to administer the repeal of entertainment expenses. We expect the IRS to issue new entertainment guidelines in the near future.
Entertainment expenses, including business meals, are an “ordinary and necessary” expense of the employer or organization. Section 162 that defines “ordinary and necessary” was not amended in the new Tax Reform.
- If an employer or organization “directly” pays for business meals or home entertainment for any employee, it will not be taxable compensation to the employee; but is not tax deductible by the employing organization. (This is a moot issue for 501(c)(3) organizations.)
- There is disagreement among tax experts and commentaries regarding business meals and home entertainment along these viewpoints:
Viewpoint #1: The repeal of all entertainment expenses that are directly related to or associated to a trade or profession does not include business meals or home entertainment. Instead, the new tax reform only repealed entertainment such as golf, sporting events, theater, Disneyland, etc. Business meals and home entertainment are deductible and can be reimbursed by the employer as a tax-free fringe benefit just as prior to the new Tax Reform rules.
Viewpoint #2: The repeal of all entertainment expenses includes business meals and home entertainment and these expenses are no longer tax deductible. Employer reimbursements that are part of the minister’s pay package for meals and home entertainment must be included in the employee’s taxable compensation.
Many tax experts and commentaries have been silent on this issue likely due to a variety of reasons. Either they don’t know, don’t want to commit to a public opinion or are waiting for IRS guidance before offering an opinion.
In the meantime:
Employers can make choices on how to handle their ministers’ or employees’ business meals and home entertainment expenses. Here are two options with the pros and cons of each:
1. You can continue to reimburse the employee the same way (using an accountable reimbursement plan) as before Tax Reform and assume that when new IRS guidelines are issued there will be no changes to business meals and home entertainment expenses. Or assume that an accountable reimbursement plan meets the qualifications of direct payment for business meals and home expenses, as some argue.
Advantage: This does not require any change to existing policies, assuming they are set up properly.
Disadvantage: When IRS guidelines are issued, business meals and home entertainment expenses may be clearly disallowed and all reimbursements for these expenses may be taxable compensation retroactive to January 1, 2018.
2. The church or employer organization initiates a new policy to directly pay the ministers’ or employees’ business meals and home entertainment expenses that are not included in the minister’s pay package. This would entail a line item in the church’s budget.
Advantage: This will ensure that the direct payments under “general and administrative expenses” by the church or employing organization will not be taxable compensation regardless of the outcome of new IRS guidelines. This is the safest and most conservative approach.
Disadvantage: This may require some changes and planning to implement a new policy. It’s not terribly complicated and we can certainly help if you need more guidance.