Changes in Tax Law Affect Church-Related Business Expense Reporting
How the Tax Cuts and Jobs Act affects pastors
QUESTION: I have heard that the Tax Cuts and Jobs Act of 2017 changes the way ministers report church-related business expenses, whether reimbursed or not. Can you explain what has changed and how that affects us when we file federal income taxes?
ANSWER: Most church staff members have business expenses. Common examples include transportation, travel, entertainment, books and subscriptions, education, computers and a home office.
The tax treatment of these expenses fundamentally changed with the Tax Cuts and Jobs Act of 2017. Here are the points to know:
- Most of the changes to the deductibility of business expenses took effect in 2018 and expire at the end of 2025.
- Un-reimbursed business expenses are no longer deductible by employees as itemized expenses on Schedule A (Form 1040).
- Employee business expenses reimbursed by a church under a “non-accountable” plan are no longer deductible by employees as itemized expenses on Schedule A (Form 1040).
- The limitations on the deductibility of employee business expenses (summarized in the preceding two bullet points) can be avoided if the church adopts an accountable reimbursement plan.
An accountable plan is one that meets the following four requirements:
- Only business expenses are reimbursed;
- No expense reimbursement is allowed without an adequate accounting of expenses within a reasonable period of time (not more than 60 days after an expense is incurred);
- Any excess reimbursement or allowance must be returned to the employer within a reasonable period of time (not more than 120 days after an excess reimbursement is paid);
- An employer’s reimbursements must come out of the employer’s funds and not by reducing the employee’s salary.
Under an accountable plan, an employee reports to the church rather than to the IRS. The reimbursements are not reported as income to the employee, and the employee does not claim any deductions. This is the best way for churches to handle reimbursements of business expenses.
Church staff members who report their income taxes as self-employed can deduct their business expenses directly on Schedule C. They can deduct their expenses even if they are not able to itemize deductions on Schedule A. But note that very few pastors would be considered self-employed by the IRS for income tax reporting (although they are self-employed for Social Security), so this “solution” should not be adopted without the assistance and approval of a tax professional.
The bottom line is that church employees who incur un-reimbursed business expenses, or expenses reimbursed under a non-accountable plan, will no longer be able to deduct them on their tax returns. They must be paid out of the employee’s pocket.
This will be a hardship for some. The way around this is for a church to implement an accountable expense reimbursement arrangement as described above. Churches that fail to do so will be exposing staff members to a needless tax increase as a result of the non-deductibility of expenses incurred on behalf of the church.
This article originally appeared in the Summer 2019 issue of Called to Serve, the Assemblies of God Ministers Letter.