Any financial assistance that a minister’s employer can give is appreciated. A car allowance can be especially helpful. Car allowances, however, must be established as “accountable plans.” This means that any advances given by the employer to the minister must be properly substantiated on a timely basis or the law requires the minister to refund the unspent, undocumented portion of the allowance.

It’s a better idea to offer a professional expense allowance under accountable plan rules of the IRS (instead of a car allowance) that covers car expenses and any other professional expense. Documentation can then include non-auto costs such as air travel, lodging, conferences, gifts, entertainment, books, supplies, and any other legitimate ministry-related expenditure. The minister documents car expenses when he provides a record of the date, business purpose, and number of miles for each trip. The total miles submitted for reimbursement should then be multiplied by a per mile rate adopted by the church. The IRS sets maximum per mile rates each year that may be used if the church wishes without requiring inclusion of the reimbursement payments on the minister’s annual Form W-2.

Even though the IRC permits the payment of advances, church funds will be managed more effectively if the church budget establishes an expense category with an annual limit and if the church only disburses funds as documentation is received.

Tax-saving opportunity: For 2015, the IRS increased the allowable mileage reimbursement/deductibility rate to 57.5 cents per mile.

Tax-saving opportunity: Ministers who incur unreimbursed employee business expenses may include these costs as miscellaneous itemized deductions on Schedule A. Unfortunately, these deductions often do not reduce ministers’ taxable income because of required modifications for two percent of Adjusted Gross Income and for the prorated tax-free portion of their income (i.e., the housing allowance) (source: Publication 517). However, many ministers fail to also reduce their self-employment taxable income on Schedule SE by these same amounts.

This information is provided as a service of MinistryCPA.org to ministers and Christian ministries. Please contact us or your personal professional advisor to determine how this information may apply to your own situation.