Many ministers have an office in their home. For the costs of a home office to be deductible as a business expense for a taxpayer on his or her tax return, the office must be used exclusively and regularly in the taxpayer’s trade or business. But in the case of a minister who is receiving a housing allowance (either as an active minister or as a retired minister), can the expenses associated with a home office be deductible as a business expense on his or her tax return?
The answer clearly seems to be NO.
In Deason v. Commissioner, 41 T.C. 465 (1964), the Tax Court ruled that section 265 of the Internal Revenue Code denied a deduction for any expense allocable to tax-exempt income. Although the Deason decision involved transportation costs, the principle of the case is thought to apply to the home office expenses of a minister. In other words, the Deason case is interpreted to prohibit a minister who is claiming a housing allowance from being entitled to the home office deduction.
The Internal Revenue Service Audit Guidelines for Ministers clearly denies this deduction, while noting in the alternative that “double dipping” for mortgage interest and taxes is allowable:
The church often provides an office on the premises for the minister, so the necessity of an office in the home should be questioned closely. Furthermore, since the total cost to provide the home is used in computing the exempt housing allowance, home office deductions for taxes, insurance, mortgage interest, etc. would be duplications. (Note that itemized deductions are allowable for mortgage interest and taxes. IRC § 265(a)(6), and Rev. Rul. 87-32, 1987-1 C.B. 131).
Simply put, if you are getting a ministerial housing allowance, you should not be claiming a home office deduction. A minister can claim one or the other. Due to the “recapture” provision relative to the home office deduction and the scrutiny that the home office deduction still comes under from the IRS, it seems to be a rather simple decision – the minister will get much more savings generally out of the housing allowance than from the home office deduction. The housing allowance is basically a tax credit while the home office deduction is just that – a tax deduction. Credits are generally much better than a deduction.
Besides, if the housing allowance should go away in the future, the minister can then claim the home office deduction.