If you’re like a lot of clergy members, you had an unpleasant surprise this tax season when you learned that you can no longer deduct unreimbursed church business expenses with your itemized deductions. You’re probably used to covering a lot of church expenses yourself, knowing that you’ll get some kind of reward for it come tax time. Except this year it didn’t come.
Why not?
What Happened To The Unreimbursed Business Expense Deduction
Part of the 2017 Tax Cuts & Jobs Act was the elimination of the unreimbursed business expense deduction. The goal was to simplify taxes as much as possible, so a number of deductions were eliminated or changed.
Before 2018, you could deduct unreimbursed business expenses if you itemized your deductions. The deduction amount would be calculated on Form 2106 and then deducted on Schedule A so that you wouldn’t have to pay income taxes on it. That line (line 21) is gone from the new Schedule A.
How To Avoid Paying Taxes On Unreimbursed Church Business Expenses
So, the deduction is gone. What can pastors do? Are you just simply out of luck?
I’m happy to tell you that no, you’re not out of luck. There is another way to avoid paying taxes on the church expenses that you pay for out of pocket.
How? By having your church set up an Accountable Plan.
What Is An Accountable Plan?
An accountable plan is a business expense reimbursement plan that follows IRS rules. With an accountable plan, expenses can be reimbursed without being subject to withholding taxes or W-2 reporting. This is important for pastors because it is one of the only ways (aside from a 403(b) plan) to lower taxable income for Social Security purposes.
If your church reimburses you with a non-accountable plan (meaning it doesn’t follow IRS rules), then that reimbursement is considered part of your compensation, which is taxable. Even if you don’t end up paying income tax on it (because of the housing allowance, deductions, etc.), it is still subject to the 15.3% self-employment taxes (for those who haven’t opted out).
What Church Expenses Qualify?
Accountable plans cover all expenses that are ordinary and necessary. Ordinary means that it is common and acceptable for people in your position. If you are a Methodist minister who wears a robe every Sunday, then cleaning those robes would be an ordinary expense. If you wear ripped jeans when you preach on Sunday, then dry cleaning costs for robes would not be ordinary for you.
A necessary expense is one that is helpful and appropriate for someone in your position. If you live in the Montana countryside, then the gas you use to drive to your parishioners’ homes is a necessary expense. It’s not like you can take the subway or anything.
Also, though it seems obvious, the expenses must be ministry expenses and not personal. Your travel expenses to visit your family for the holidays do not count, even if your brother-in-law really needs Jesus. It’s just not the same as when you travel to visit one of your congregation members in the hospital.
Other Benefits Of Accountable Plans For Churches
Another great thing about accountable plans is that they aren’t just for pastors. Unlike perks like the housing allowance, all church employees can benefit from an accountable plan. That means the children’s ministry coordinator, the church secretary, even the janitor can make use of the plan.
Finally, and this is usually a church’s favorite, they are free! You don’t have to pay a bunch of money to set up or maintain one. Complying with the IRS rules may take a little bit more staff time, but other than that, they’re free. Does it get any better than that?
So, if you regularly pay church expenses out of your own pocket and are mourning the loss of the unreimbursed business expense deduction, cheer up. Have your church set up an accountable plan and you’ll be better off than when you started.
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