Q: Our church designates, in writing, a housing allowance for our pastor on an annual basis (usually late November for the upcoming fiscal year–for example in November 2011 we submitted our proposed budget for 2012).
We now have a member who wants to modify the pastor's housing allowance and give the pastor an additional amount and designate it as the 2012 housing allowance. He referenced an auditor from a tax service about this issue and was told there would be no problem (tax wise) if our church decided to "adjust" the pastor's housing allowance in October for fiscal year 2012.
If we record this action in our business meeting minutes for October 2012 and increase the housing allowance for 2012 (about double the designated amount), are we within the tax laws?
A: Rich Hammar addresses this question in the Church & Clergy Tax Guide:
While neither the IRS nor the courts have addressed this question, it seems perfectly reasonable to conclude that the church can amend its housing allowance designation during the course of the year if changed circumstances render the allowance inadequate. Of course, any change would only operate prospectively.
In other writing on this subject, Rich repeatedly notes that any change to an allowance cannot be applied retroactively (only prospectively, as he notes above). Based on your question, it appears your church uses a fiscal calendar year that runs January to December. Your proposed adjustment in October would apply for the months of October, November, and December; everything prior to October (January to September) would operate under the original housing allowance amount set heading into the fiscal year.
This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is published with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations."
Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.