Business expenses place more ministers in the “cross hairs” of the Internal Revenue Service than any other issue. Claiming excessive business mileage is probably the number one reason that ministers are audited.
Usually, churches will adopt an accountable plan that provides full reimbursement for all professional business expenses or provides reimbursement up to a specified annual limit. Even if a limit is placed on the accountable reimbursement account, it should be viewed as an annual limit. It is also better not to break down the different categories of the limit, such as so much for mileage, so much for conventions, etc. An overall limit works best. For example, assume that the church sets an accountable reimbursement limit of $500 a month. That amount should be considered as an overall amount, with the minister submitting receipts to show how the money was spent that month. In one month, mileage may be a big factor while travel may be the overriding factor in another month. The annual limit allows for those deviations and also allows the pastor to spend $1000 in one month to attend a convention while only spending $200 or so in other months. Again, the monthly limits can be used for the local church to track the budgetary impact but the $500 a month used in the example should be viewed as a $6,000 annual limit. An estimate of accountable reimbursement expenses is helpful for planning purposes. TheEstimate of Accountable Reimbursement Expenses form allows for such planning.
If the accountable plan meets all the requirements of the IRS regulations as set out earlier, the amounts paid under the arrangement are excluded from the minister’s gross income and are not required to be reported on his Form W-2. On the other hand, if the plan does not meet IRS standards, then the payments are included as gross wages and are taxable.
The IRS makes very clear that a salary reduction arrangement which “reimburses” the minister for business expenses by reducing his salary does not qualify as an accountable plan. They apply this rule whether the amount varies by pay period or is a specific amount. If the minister is entitled to receive the full amount of annual compensation, regardless of whether or not business expenses are incurred during the year, the arrangement does not meet the “accountable plan” provisions.
Church of God Benefits Board, Inc. 