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Tax Court Applies "Deason Rule" to Minister's Business Expenses

Rule reduces ministers' business expense deduction.

Young v. Commissioner, T.C. Summary Opinion 2005-76.

Background. Under the so-called "Deason rule" (named after a 1964 court case) ministers must reduce their business expense deduction for unreimbursed expenses as well as expenses reimbursed under a nonaccountable arrangement by the percentage of their total church income that consists of a tax-exempt housing allowance.

For example, assume that Pastor Brad has total church income of $40,000, which includes a $10,000 housing allowance. He also incurs unreimbursed business expenses of $4,000. Since one-fourth of his church income is tax-exempt ($10,000 out of $40,000) he must reduce his business expense deduction by one-fourth. This means that only $3,000 of his expenses will be deductible.

The Tax Court applied the Deason rule in a recent case. A pastor was paid compensation of $78,000 consisting of a salary of $36,000 and a housing allowance of $42,000. He also received self-employment earnings of $21,000 for the performance of miscellaneous religious services (including weddings, funerals, and guest speaking). The pastor also incurred business expenses of $25,000 that were not reimbursed by the church, including car expenses, books, office expenses, and business trips. The IRS audited the pastor's tax return, and claimed that his deduction for business expenses had to be reduced by the percentage of his total church income that consisted of a housing allowance. The pastor insisted that his business expense deduction should not be reduced by the percentage of his total income that was tax-exempt.

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