Update: This post was updated on 5/22/14 to clarify the tax deductibility of contributions made by donors toward a trip.
Q: Our church's CPA says that because a Holy Land trip will serve in the continuing education of our pastor, it would be a tax deductible expense, and that anyone who contributes to the pastor's trip may receive contribution credit. Is this correct?
A: There are two questions here: (1) Whether the trip is a tax deductible benefit for the pastor; and (2) whether donors may receive contribution credit for giving toward the trip.
Regarding the first question, Richard Hammar directly addresses it in Chapter 4 of the Church & Clergy Tax Guide. Basically, he notes many churches present their minister with an all-expense paid trip to the Holy Land. This benefit constitutes taxable income if either or both of the following statements are true:
- The trip is provided to honor the minister for his or her faithful services on behalf of the church.
- The trip is provided to enhance or enrich the minister's ministry. While a trip to the Holy Land can benefit one's ministry, such a trip is not a business expense under current law. The tax codes provides that "no deduction shall be allowed ... for expenses for travel as a form of education" IRC 274(m)(2).
Attorney Frank Sommerville, an editorial advisor for ManagingYourChurch.com, further explains:
"The only way that the trip is a business expense is if (the pastor) is leading a church group on a church-sponsored trip. If he or she provided the education to the participants as a representative of the church, then the trip expenses are not taxable," he said. "If he is simply a participant, it is taxable income. I always tell clients to look at who is benefitting from the trip. If the pastor is benefitting, it is taxable because it is outside the U.S."
A spouse accompanying the pastor has to meet the same rules, Sommerville added.
Should you conclude that the trip is not business-related, the church's payment of the cost of such a trip is treated as the payment of personal vacation expenses, and the full amount must be included as taxable income on the minister's Form W-2 (or 1099-MISC if self-employed). This includes transportation, meals, and lodging.
Regarding the second question, a donor can give to the church toward the trip–regardless of whether it represents taxable income for the pastor–and receive a contribution credit from the church if the following is true:
- the church retains "full control of the donated funds, and discretion as to their use";
I highly recommend you and your CPA obtain a copy of the tax guide to help you navigate these types of questions.
For further help navigating any funding of overseas activities by your church, see Frank Sommerville's article, "Funding Foreign Activities," in the March/April 2014 issue of the Church Law and Tax Report, along with the Church & Clergy Tax Guide.
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