Following guidance given in an unpublished Tax Court decision from 1992, some ministers continue to contend that the tithes they pay to the local church should be treated as a business expense rather than as a charitable deduction. If a minister is allowed to treat tithing as a business expense, the minister would then be able to deduct his tithes from his compensation before taxes (both federal income taxes and SECA taxes) were calculated. Such would allow for substantial tax savings to the minister.
In the 1992 tax court case mentioned above, Forbes v. Commissioner, T.C. Sum. Op. 1992-167 (unpublished), the local church had adopted a “tithing policy” that mandated that every minister and employee of the church had to pay a tithe of 10 percent of their total compensation back to the church. In a review of the church’s policy, the court found that several employees had been terminated for failing to comply with the tithing policy. The court found that “ordinary and necessary expenses” incurred in carrying out a business can be claimed as business expenses. Since a minister or church-employee for this local church could not retain their position unless they paid the “mandatory” tithe, the court reached the conclusion that the tithe was a business expense – and therefore, could be deducted pre-taxes.
In trying to make the Forbes case applicable to ministers in the Church of God, it should be noted that the General Assembly Minutes at S55 provides that “since we do not license or ordain applicants for the ministry unless they pay tithes, they are required to pay tithes to retain their license.” Although historical data may reveal that ministers in times past were “disbanded from the fellowship” for failure to pay their tithes to the local church, it might be difficult to prove the mandatory nature of tithing by Church of God ministers today. While the Minutes seem to create a mandatory requirement, the enforcement of the “tithing policy” probably would prove to be problematic.
Most importantly, the issue of whether charitable contributions made by a minister may be treated as deductible business expenses is addressed directly by the IRS. The Internal Revenue Service “audit guidelines” for ministers clearly address this issue in a section entitled Dues vs. Contributions:
Dues versus Contributions. Ministers often pay a small annual renewal fee to maintain their credentials, which constitutes a deductible expense. However, ministers’ contributions to the church are not deductible as business expenses. They may argue that they are expected to donate generously to the church as part of their employment. This is not sufficient to convert charitable contributions to business expenses. The distinction is that charitable contributions are given to a qualifying organization (such as a church) for the furtherance of its charitable activities. Dues, on the other hand, are usually paid with the expectation that a financial benefit will result to the individual, as in a realtor’s multi-list dues or an electrician’s union dues. A minister’s salary and benefits are not likely to directly depend on the donations made to the church. They may still be deducted as contributions on Schedule A but may not be used as a business expense to reduce self-employment tax.
While every tax liability can be challenged, the “audit guidelines” seem to provide more applicable guidance than the Tax Court’s decision in the Forbes case. While we have reviewed the holding in the Forbes case here, it should be noted that the Forbes case can not be cited as legal precedent in a hearing before the IRS or the Tax Court. Because the participants in the Forbes case used an expedited procedure to get a determination, the case is unpublished and cannot be cited in a legal argument. No other court has adopted the Forbes decision and it seems to be in contradiction to every official position taken by the IRS, including the “audit guidelines” as quoted above. If a minister chooses to follow the guidance given in Forbes, he or she should be well aware that they are taking a risky position that most likely will be challenged by the IRS – and such may result in penalties, back taxes, and interest.
Note: While a pastor should not deduct his tithe to the local church pre-tax, the pastor can request that his tithes be withheld from his paycheck on a regular basis, just as he might have a portion of his salary set aside to go into a savings account. This does not reduce his salary (he still is taxed on his whole salary amount, including what goes back to the church as tithe and what might go to his savings account) but it does keep him from having to cut a check each week for tithes. The pastor’s W-2 would report the total amount and the treasurer would also need to give the pastor a charitable gift receipt for his contributions (even though they were withheld), assuming that they were over $250 each. For gifts under $250, the pastor’s paycheck stub could serve as a contemporary “bank record” for charitable deduction purposes, assuming that such was clearly delineated.