By Dr. M. Stanley Butler
As we enter the tax season, those who are active in ministry are beginning to pull together their financial records to prepare for their annual filing. In practice, we strive to be good stewards of the resources that God provides. Part of being a good steward is having an awareness of the deductions that are afforded to clergy as well as the handling and documentation requirements that substantiate the deductions.
It’s important to note that ordained ministers have “dual status.” This is really where it all begins, as far as the Internal Revenue Service (IRS) is concerned. Most are considered employees of their churches for income tax reporting purposes, while all are considered self-employed for Social Security purposes. Your designation as a contractor (self-employed minister) or employee will determine how your expenditures will be reported on your tax filing.
You’ll notice that I mention that “most” ministers are considered employees. If you’re a pastor with a governing board that you work with or for to determine the ministry’s direction, strategic imperatives, or overall work to be performed, then you most likely fall in the “employee” category. There are exceptions and you will want to consult a tax professional to ensure that you’re operating and reporting under the correct status. However, the issue of control within the church is a key measure of the IRS, when determining how a minister should be designated.
I want to provide you with a snapshot of seven of your greatest tax breaks:
1. Entertainment: Meals may be deductible (within limits), if you can substantiate the expenditure, i.e. a business relationship and meeting at the time and place of the expenditure. This is a gray area on many tax returns. For more information, you should familiarize yourself with IRS Topic 512 and Publication 463.
2. Travel: Work-related travel, e.g. hospital and nursing home visits, are deductible. However, documentation is very important. Mileage logs should be meticulously maintained and always include:
• Travel date
• Place of travel
• Business purpose
• Relationship to the individual with whom you met, i.e. church member, attorney,
• Miles traveled
• A running balance of miles traveled, i.e. odometer readings for every trip
3. Education: Does your church or regulation require you to have specific or additional education; or do your educational pursuits improve or maintain your skills, so that you may keep your job? If so, then your tuition, books, supplies (even correspondence courses) are tax deductible.
4. Fees/Dues/Subscriptions: Subscriptions to professional journals and religious publications, dues to professional organizations and/or societies, and seminar and conference fees are deductible.
5. Clothing: Robes and vestments are deductible. The qualifier is these garments are generally not worn for occasions other than ministry, i.e. your business suits are not deductible.
6. Resource Books: Religious books and publications such as theological dictionaries, concordances, etc.
7. Housing Allowance: The allowance for housing is excluded from Federal Income Tax. So, it’s considered the greatest tax benefit available to ministers. The housing allowance is a calculated portion of a minister’s compensation. While it is excluded from your Federal Income Tax, it is not exempt from your Self Employment Tax (Social Security and Medicare). There are subtle intricacies to properly setting up and maintaining a housing allowance.
• The Housing Allowance must be board-approved before it is paid (a housing allowance is never retroactive)
• You must spend the allowance on eligible housing expenses during the year, i.e. rent/mortgage payments, mortgage interest, home insurance, utilities, property tax, etc.
The housing allowance calculation is supported by the forecast expenditures provided by the you, the minister. Thus, it is the your responsibility to ensure that the calculation is properly and accurately adjusted annually.
If you are provided a parsonage to live in by your church, you are not subject to income taxes on the use of the parsonage. However, the fair rental value of the parsonage (you make the determination of that value) is added into the calculation of your self- employment tax. If the utilities are paid by the church, then those expenditures are also added into the calculation of self-employment tax.
Ministers who are classified as an employee are limited to claiming their unreimbursed business expenses as an itemized deduction on Form 1040 Schedule A. These business expenses are only deductible if and at the point they exceed 2% of the minister’s adjusted gross income (AGI). However, contractors (self-employed ministers) can deduct their professional or business expenses on IRS Schedule C.
Now, if your eyes are rolling back in your head and you’ve pretty much resolved that you don’t want to deal with any of this, don’t be intimidated by the designations, categories, qualifiers, and tax double talk. What’s most important is being mindful of the seven tax breaks and ensuring that you consistently keep the appropriate records to justify the expenditures being reported. The wisest advice that I couple with all tax information, to avoid enabling a loophole to become a noose, is to work with a qualified tax professional who can effectively navigate these waters with your individual circumstances in mind.
It is important to note that, except for the housing allowance, these tax breaks are monitored throughout the year and claimed at year end. The housing allowance is the greatest of these benefits and requires proactivity. When we consider ourselves stewards of the resources that God has given, more often than not, the act of stewardship requires a degree of forethought regarding how those resources are handled; not just how they’re reported. There are investment instruments, such as the Roth Self-Directed IRA, that enables those who take a proactive role in their financial planning to set aside monies for retirement while empowering them to invest those funds and realize tax-deferred gains. While instruments such as this is not specific to clergy, it advances the intent to effectively steward God-given resources; enabling them to be handled in a manner that not only consumes but allows for financial growth.
From the standpoint of a minister, the tax breaks are appreciated; however, it is within the substantiating efforts that the greater value is realized. It is the handling of resources with forethought and transparency that speaks to the integrity of our faith and willingness to be examined in the light of truth.
* * * * *
Dr. M. Stanley Butler, D.Div., MPA, MBA, is an author, teacher, and conference speaker. Hailing from Cleveland, Ohio, his ministry and message has taken him to Asia, Africa, Europe and many cities across the United States. With a heart to challenge God’s people onward toward Christian maturity and faith as a lifestyle, he has expounded upon topics that include The True Worshiper, Walking In God-Ordained Purpose, and Foundational Truths of the Christian Faith. Through his consulting practice, STEPS, Inc., Dr. Butler has aided Christian ministries and nonprofit organizations through fundraising efforts as well as establishing financial policy, board development, and implementation of best practices. Learn more at:www.mstanleybutler.com. Contact Dr. Butler at [email protected] or by calling 877.447.0900.