Travel Expenses: Are Pastors' Costs Tax Deductible?

Clergy members often have to cover church expenses themselves, and they may be able to deduct these unreimbursed ministry expenses from their taxable income. These expenses must be ordinary and necessary, meaning they are common and accepted in their industry and appropriate and helpful to their ministry. Travel expenses are a common type of professional expense for pastors, and they can be deducted as a business expense if the arrangement is temporary rather than indefinite. However, if the work assignment exceeds one year, the pastor's tax home changes, and travel expenses are no longer incurred.

Travel expenses are tax-deductible if the work assignment is temporary

Travel expenses are tax-deductible for pastors if the work assignment is temporary. In this context, "temporary" means lasting less than a year. If a pastor travels to another town to conduct religious services for a period of less than a year, their travel expenses may be considered a business expense and may be tax-deductible.

The Internal Revenue Service (IRS) considers a taxpayer's home to be the vicinity of their principal place of employment, rather than their personal residence. However, if a pastor's principal place of employment is temporary, their personal residence may be considered their home, and they may be able to deduct travel expenses. It is important to note that the IRS specifies that a period of employment exceeding one year is not considered temporary.

Pastors can deduct unreimbursed ministry expenses that are ordinary and necessary for their work. Ordinary expenses are those that are common and accepted in their industry, such as fuel, oil, tires, and maintenance for their vehicle. Necessary expenses are those that are appropriate and helpful to their ministry, such as travel costs to visit congregants in the hospital.

To ensure compliance with IRS rules and optimize tax benefits, churches can set up an Accountable Plan, which is a business expense reimbursement plan. With an Accountable Plan, expenses can be reimbursed without being subject to withholding taxes or W-2 reporting. This allows pastors to lower their taxable income for Social Security purposes. It is important for pastors and churches to work together to determine expected church-related expenses and approve them in advance to facilitate proper documentation and compliance with IRS guidelines.

Travel expenses are not tax-deductible if the assignment is indefinite

The Internal Revenue Service (IRS) defines "travel expenses" as the ordinary and necessary expenses of travelling away from home for business, profession, or job purposes. These expenses must be incurred while conducting business-related activities, and they must be reasonable.

The IRS considers employees to be "travelling" if their work obligations require them to be away from their "tax home" for substantially longer than an ordinary workday, and they need to sleep or rest to meet the demands of their work while away. "Tax home" refers to the entire city or general area where an individual's main place of business or work is located.

Examples of deductible travel expenses include airfare, lodging, transportation services, meals and tips, and the use of communication devices.

It is important to note that individual taxpayers can no longer deduct unreimbursed business expenses. This deduction was eliminated by the Tax Cuts and Jobs Act of 2017. However, if self-employed or operating a business, these "ordinary and necessary" business expenses can be deducted from tax returns.

The IRS considers the allowance method a non-accountable plan

Travel expenses for pastors are considered business expenses. In the past, pastors could deduct unreimbursed business expenses if they itemized their deductions. However, the 2017 Tax Cuts and Jobs Act eliminated this option. Now, pastors can no longer deduct unreimbursed church business expenses with their itemized deductions.

To address this change, churches can set up an Accountable Plan, which is a business expense reimbursement plan that adheres to IRS rules. With an accountable plan, expenses can be reimbursed without incurring withholding taxes or W-2 reporting. This is advantageous for pastors as it lowers their taxable income for Social Security purposes.

An alternative to the Accountable Plan is the allowance method, which the IRS considers a non-accountable plan. Under this method, professional expense amounts are paid to the pastor throughout the year according to the church's payroll cycle. The pastor is not required to provide receipts for these expenses. However, these expense amounts are taxable and must be reported as wages in Box 1 of the pastor's Form W-2 at the end of the year.

While the allowance method may be easier to administer, it may not be the most tax-efficient option. Churches should be cautious about switching from the allowance method to the accountable reimbursement method at the end of the year, as it may lead to issues with proper documentation, accounting for expenses within IRS guidelines, and accurate reporting of compensation.

In summary, while travel expenses for pastors are considered business expenses, the specific treatment of these expenses for tax purposes depends on the reimbursement method chosen by the church. The allowance method, considered a non-accountable plan by the IRS, may provide convenience in administration but may not offer the same tax benefits as an Accountable Plan.

The accountable reimbursement method is a reimbursement of actual expenses incurred

Travel expenses for pastors can be considered a business expense, but only if they are reimbursed through an accountable plan. An accountable plan is a method for reimbursing employees for any business-related out-of-pocket expenses on a non-taxable basis. This means that if the Internal Revenue Service's (IRS) requirements are met, reimbursements for eligible business expenses do not count as income and are not subject to withholding taxes or W-2 reporting.

To be considered an accountable plan, the expenses must be business-related, adequately reported, and any excess reimbursements must be returned. Business-related expenses can include travel, meals, lodging, entertainment, or transportation. It is important to note that only expenses that are ordinary and necessary can be covered by an accountable plan. Ordinary means that it is common and acceptable for people in the pastor's position. For example, if a pastor wears a robe every Sunday, then cleaning those robes would be an ordinary expense. A necessary expense is one that is helpful and appropriate for someone in the pastor's position. For example, if a pastor lives in a rural area, the gas they use to drive to their parishioners' homes is a necessary expense.

In addition to travel expenses, other types of professional expenses for pastors may include computers, office supplies, postage, books, subscriptions, professional dues, vestments, and continuing education. Churches can choose to reimburse pastors for all, partial, or none of these ministry-related expenses. However, it is important to note that if a church reimburses with a non-accountable plan (one that doesn't follow IRS rules), then that reimbursement is considered part of the pastor's compensation and is taxable.

The accountable plan is a business expense reimbursement plan that follows IRS rules

An accountable plan is a business expense reimbursement plan that adheres to IRS rules. It is a method for reimbursing employees for any business-related out-of-pocket expenses on a non-taxable basis. According to IRS rules, expenses are reimbursed if they are business-related and adequately accounted for. This includes expenses such as travel, meals, lodging, entertainment, or transportation.

For pastors, an accountable plan is one of the few ways to lower taxable income for Social Security purposes. An accountable plan ensures that reimbursements for ministry expenses are not considered part of the pastor's compensation, which would be taxable. Ministry expenses can include automobile expenses, meals with parishioners, books, computers, printers, office supplies, conferences, and some clothing and dry cleaning.

To qualify as an accountable plan, there are three main requirements that must be met:

• The expenses must be business-related: Expenses must be incurred within the course of employment and have a clear business connection or purpose.
• Adequate accounting: Employees must provide proper documentation and substantiation of expenses, typically in the form of receipts, invoices, or other records.
• Return of excess reimbursement: Any reimbursement amounts that exceed the actual expenses must be returned to the employer within a reasonable period, generally within 120 days.

It is important to note that employers are not required to submit their accountable plan details to the IRS, but they must be able to demonstrate compliance with the requirements if audited.

By following these guidelines, pastors and other employees can ensure that their business-related expenses are reimbursed without being subject to withholding taxes or reported as income on their tax returns.

Frequently asked questions