Loading the player...
Overseas Missions in Your Church: Legal and Tax Considerations
Video: The legal issues your church needs to consider when it ministers overseas.
Do Churches Report Gifts on W-2 Forms?
Are gift certificates to church staff taxable?
Last Reviewed: February 4, 2025
Q: We provide every employee with a gift certificate of $20 on his or her birthday that can be used at a nearby restaurant. We have always assumed that these gifts are not taxable income, and so we have not included them on employees’ W-2 forms at the end of the year. But a few staff members insist that this is a taxable fringe benefit. Who is correct?
In general, a de minimis benefit is one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical. De minimis benefits are excluded from tax under section 132(a)(4) of the tax code and include:
- Occasional employee use of photocopier
- Occasional snacks, coffee, doughnuts, etc.
- Holiday gifts
- Occasional meal money or transportation expense for working overtime
- Flowers, fruit, books, etc., provided under special circumstances
- Personal use of a cell phone provided by an employer primarily for business purposes
In determining whether a benefit is de minimis, you should always consider its frequency and value. An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation.
Whether an item or service is de minimis depends on all the facts and circumstances. In addition, if a benefit is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. The IRS has ruled previously in a particular case that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances.
Cash cannot be a de minimis fringe benefit since accounting for it is never unreasonable or impractical. An exception is provided for occasional meal or transportation money to enable an employee to work overtime. The benefit must be provided so that the employee can work an unusual, extended schedule. The benefit is not excludable for any regularly scheduled hours, even if they include overtime. The employee must actually work the overtime. Meal money calculated on the basis of number of hours worked is not de minimis and is taxable wages.
Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not a de minimis benefit and are taxable. But the IRS maintains that “a certificate that allows an employee to receive a specific item of personal property that is minimal in value, provided infrequently, and is administratively impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances.”
If a benefit qualifies for exclusion, no reporting is necessary. If it is taxable, it should be included in wages on Form W-2 and is subject to income tax withholding (unless exempt, as in the case of a minister who has not elected voluntary withholding). If the employees are covered for Social Security and Medicare, the value of the benefits is also subject to withholding for these taxes. Again, this is not true for ministers with respect to compensation received from the exercise of ministry. As to such services, ministers are self-employed for Social Security and pay the self-employment tax.
Is Donated Parking Space for Churches Tax Deductible?
Understand the rules for tax-deductibility of donated parking spaces for churches and the correct method to document contributions.
Last Reviewed: January 17, 2025
Q: A church member allows us to park our buses at his business. We used to pay $200 a month for this service. In the past, we have given this church member a letter indicating a donation of $2,400 per year, which he could use as a charitable contribution. Our question is, “What is the proper method to handle this?”
Are Donated Services Tax Deductible?
The IRS does not allow the deduction of donated services as a charitable contribution, even if they provide significant value to the recipient. In this case, the use of parking spaces falls under the category of donated services. As a result, the church member cannot claim a tax deduction for the parking space offered to the church.
How Should Churches Acknowledge Donated Services?
While the donation of services is not tax deductible, churches can express their gratitude in other ways:
- Provide a thank-you letter acknowledging the contribution of parking space.
- Avoid stating any monetary value or suggesting it qualifies as a charitable deduction.
What Should the Thank-You Letter Include?
The thank-you letter should follow these guidelines:
- Express gratitude for the use of the parking space.
- Acknowledge the church member’s generosity without assigning a dollar amount.
- Clarify that no goods or services were exchanged for the contribution.
Why Is This Important?
Providing clear documentation helps avoid any misunderstandings about the tax deductibility of services. It also ensures the church operates within IRS guidelines for charitable contributions.
Learn More About Charitable Contributions
For additional information about charitable contributions and compliance, see Chapter 8 of Richard Hammar’s Church & Clergy Tax Guide.
FAQ: Donated Parking Space
Can the donor receive any form of compensation? Any compensation provided would disqualify the act as a donation and may create taxable income for the donor.
Can services be claimed as a tax deduction? No, donated services, including the use of parking spaces, are not tax deductible.
What if the donor estimates a fair market value? Even with an estimate, services cannot be deducted as charitable contributions under IRS rules.
Should the church issue a receipt for donated services? No, instead, issue a thank-you letter without assigning monetary value.
How You Describe Your Church May Affect Tax Exemption
Learn how describing your church in business terms may affect its tax exemption status.
Last Reviewed: January 9, 2025
Business-savvy church leaders sometimes use business jargon to describe their activities and efforts. A recent IRS denial of exemption for a nonprofit religious organization highlights why this practice can be problematic.
IRS Denial Based on Business Jargon
In a denial letter released on March 8, 2013, the IRS addressed a 501(c)(3) exemption application by a religious organization. The organization described itself as having three divisions: a Ministry Division, a Consulting Division, and a Merchandising Division. While these activities are common among religious nonprofits, the terminology used raised concerns.
The IRS noted frequent use of business jargon, including terms like “divisions,” “branches,” and “brands.” The following excerpt from the ruling illustrates the issue:
“In addition to your frequent references to Taxpayer, Church, and Website as ‘brands,’ you described the majority of your activities in the context of business models, supply chains, marketing strategies, and other, typically business-oriented approaches.”
Understanding the Commerciality Doctrine
The IRS and courts apply a “commerciality doctrine” to determine whether nonprofit organizations qualify for 501(c)(3) exemption. While not explicitly defined in the tax code, this doctrine assesses whether revenue-generating activities are overly commercial, potentially undermining an organization’s exempt purpose.
Using business jargon may give the impression that an organization operates in a commercial capacity, which could affect its exemption eligibility. Though semantics alone aren’t grounds for exemption denial, excessive use of business terms can create unnecessary challenges.
Best Practices for Churches
- Use mission-focused language: Ensure your descriptions highlight religious or nonprofit purposes rather than commercial operations.
- Exercise caution with terminology: Avoid terms like “brands,” “supply chains,” or “marketing strategies” unless absolutely necessary.
- Review your documentation: Audit your bylaws, applications, and public materials to ensure alignment with nonprofit standards.
- Seek professional advice: Consult with a tax professional to evaluate language and practices that may raise concerns with the IRS or other authorities.
Why Terminology Matters
Excessive business terminology doesn’t align with the core principles of nonprofit organizations. It may inadvertently signal to tax authorities that the organization’s purpose is commercial rather than charitable or religious. While terminology alone won’t result in exemption denial, it can influence IRS evaluations.
Conclusion
Churches and nonprofit organizations should carefully evaluate their use of business jargon to avoid creating the impression of commercial intent. By focusing on mission-driven language, churches can reduce risks and maintain compliance with tax-exempt standards.
FAQs
1. What is the commerciality doctrine?
The commerciality doctrine evaluates whether revenue-generating activities by nonprofits are conducted in a highly commercial manner, potentially undermining their exempt purpose.
2. Can business jargon alone lead to tax exemption denial?
No, semantics alone won’t result in denial. However, excessive use of business terms can influence IRS evaluations and create unnecessary challenges.
3. How can churches avoid IRS concerns about terminology?
Focus on mission-driven language, avoid excessive business jargon, and ensure all documentation reflects nonprofit purposes.
4. Should churches consult a tax professional for guidance?
Yes, consulting a tax professional can help churches evaluate their language, practices, and compliance with IRS standards.
Neglecting to “Render Unto Caesar”
Discover essential steps for clergy tax filing, including estimated payments and how to avoid penalties for noncompliance.
Last Reviewed: January 9, 2025
Ministers—especially new ones—often fail to file income tax returns. This common problem arises because churches are not required to withhold income taxes or Social Security taxes from the wages of ministers performing ministerial services. There are two primary reasons for this:
- Ministers are classified as self-employed for Social Security purposes, meaning they pay self-employment tax instead of having Social Security and Medicare taxes withheld.
- The tax code exempts ministers’ wages from income tax withholding unless voluntary withholding is elected.
Key Takeaways:
- Ministers must prepay federal income and self-employment taxes quarterly using the estimated tax procedure.
- Failure to file tax returns or pay taxes can lead to penalties, interest, and long-term consequences.
- Church leaders should educate ministers about their tax filing obligations.
Ministers are required to prepay federal income taxes and self-employment taxes using the estimated tax procedure. This means estimating their tax liability for the year and paying one-fourth of the amount quarterly. However, many seminaries fail to inform students of this obligation, leading to misunderstandings.
Common Issues for New Ministers
New ministers often assume their church will handle tax withholdings like a secular employer. When this doesn’t happen, they may rationalize not filing taxes, mistakenly believing:
- Ministers are exempt from taxes.
- Their earnings are too low to require withholding or filing.
This can result in nonpayment of taxes and failure to file tax returns. In time, many realize they owe back taxes but are unsure how to proceed.
Steps to Address Unfiled Tax Returns
Ministers who have failed to file one or more tax returns should take the following steps:
- Consult a CPA or tax attorney to determine outstanding tax obligations and available options.
- Understand potential penalties, including:
- Failure-to-file penalty: Applies if returns are not filed by the due date (including extensions), unless reasonable cause exists.
- Failure-to-pay penalty: Applies if taxes are not paid in full by the due date.
- Interest: Charged on unpaid taxes and penalties.
- Explore options for financial relief, such as installment agreements or offers in compromise, with your tax advisor.
Note: There is no penalty for failing to file if you are due a refund, but refund claims must be made within three years of the return’s due date.
Understanding Tax Filing Deadlines
The IRS enforces strict deadlines for tax filings:
- Refunds cannot be claimed after three years from the return’s original due date.
- The statute of limitations for the IRS to assess and collect taxes does not begin until a return is filed. Without filing, there is no limitation period.
Ministers who delay filing risk losing refunds and facing indefinite tax liabilities.
How Church Leaders Can Help
Church leaders play a crucial role in helping ministers meet their tax obligations. They should:
- Discuss tax filing requirements with every new minister, especially recent seminary graduates.
- Ask specific questions, such as, “How do you plan to pay your income and self-employment taxes? Through voluntary withholding or the estimated tax procedure?”
- Provide IRS Form 1040-ES and instructions to help ministers calculate and pay estimated taxes.
Educating ministers about their tax responsibilities reduces the likelihood of noncompliance and financial stress.
FAQs
- What are estimated taxes?
Estimated taxes are quarterly payments that cover self-employment and income tax obligations not withheld by an employer. - Can ministers elect voluntary tax withholding?
Yes, ministers can arrange for voluntary withholding through their church, though this is uncommon. - What happens if a minister does not file taxes?
Failure to file or pay taxes can lead to penalties, interest, and, in extreme cases, legal action. - How can churches assist ministers with taxes?
Churches can educate ministers about their obligations and provide resources like IRS Form 1040-ES to simplify the process.
Records Retention for Churches: Consent Forms and Screening Records
Churches must be ready to document its due diligence dating back decades ago.
Last Reviewed: February 11, 2025
Q: Our insurance company says we only have to keep parental consent forms for church activities and outings for three years, but someone else told us the forms need to be kept until the child turns 18 years of age, for sexual abuse purposes.
Which is true? Is there specific wording that should be included in the permission forms for this purpose? We do background checks and give safety and abuse awareness classes to all our children’s workers and teen workers. Does that alone release us from responsibility since we have done all that is reasonable to protect our children?
Reduce the risk
If a church is sued for a case of child molestation that occurred during an off-site, overnight activity, the fact that the parents of the victim signed a parental consent form allowing their child to attend the event would be of little, if any, evidentiary value in a lawsuit.
Reduce the risk of abuse with the Church Law & Tax child sexual abuse awareness program.
Parental consent forms, in general, should be retained until a minor child reaches age 18 plus the applicable statute of limitations for personal injury claims under state law.
You say your church conducts background checks and gives training classes. This work is important. It probably also requires the collection of forms and records about volunteer workers.
I’m often asked how long to keep those records, but there is no legal requirement.
But, if your church is sued for child molestation by a youth worker, you are going to want to prove due diligence in properly screening the accused worker before allowing them to work in the youth ministry.
The best way to do this is with application forms and references.
Keep in mind that the statute of limitations for child abuse claims can last for decades, and so the “best practice” is to keep these forms, as well as your liability insurance policies, permanently. Imagine being sued today for an alleged incident of child abuse occurring 25 years ago? How are you going to rebut a claim of negligent selection if you cannot establish what you did to vet the perpetrator?
Classifying Ministers for Payroll Tax Purposes
Understanding the special rules for classifying ministers for payroll tax purposes.
Last Reviewed: January 23, 2024
Unlike any other employee, a minister creates special issues for the payroll functions of a church. These issues aren’t intuitive in nature, so it’s not uncommon for errors to occur in the payroll reporting of a minister’s compensation package. One of the most confusing aspects of a minister’s compensation package is how he or she will be classified when paying into the Social Security and Medicare system.
There are two methods of paying into the Social Security and Medicare system.
1. Federal Insurance Contributions Act (FICA)
Employees traditionally pay in through the Federal Insurance Contributions Act. The employee pays into FICA via taxes withheld from their paychecks by their employers. The employer then matches the employee’s amount and pays it directly into the system on the employee’s behalf.
2. Self Employed Contributions Act (SECA)
The other system is the Self Employed Contributions Act, which assesses the tax to the self-employed individual on a Schedule SE filed with an individual’s Federal Form 1040.
Participation in each of these systems is defined in the Internal Revenue Code (IRC).
The Internal Revenue Code
IRC Section 3121 determines who is covered by FICA.
Section 3121(b)(8) states that employment for this tax doesn’t include services performed by an ordained, commissioned, or licensed minister in the exercise of his ministry.
Section 1402 governs who is covered by SECA. IRC Section 1402(c) states that a “trade or business” for purposes of SECA will include the performance of services by a duly ordained, commissioned, or licensed minister in the exercise of his ministry (if no exemption as provided by IRC Sec. 1402(e) is in effect). This explanation demonstrates that, by law, the compensation paid to a minister (for the performance of ministerial duties) is a trade or business subject to self-employment tax. It can’t be considered as wages for FICA withholding and matching. This self-employment status is mandatory, and for people who employ ministers, it’s a key concept to understand. If a minster is paid for ministerial duties, the church may never withhold FICA/Medicare taxes from the minister and pay the matching portion.
As referenced above, under IRC Sec. 1402(e), a minister may obtain an exemption from paying the self-employment tax. The minister accomplishes this by filing Form 4361. The Form 4361 is the personal responsibility of a minister and does not involve any action on the part of either the employing church or the church that issues his or her credentials. If a minister has an approved Form 4361, he or she is not required to pay self-employment tax on ministerial earnings through his or her personal tax return.
This unique treatment of ministers for purposes of paying into the Social Security system often creates two areas of confusion for churches. Let’s break down those myths:
Myth #1. If the minister is self employed, the wages should be reported on Form 1099-MISC.
As unusual as it may seem, most ministers are not truly self employed in all aspects of employment. If a minister is employed by one employer, he or she is actually considered a common law employee. This means most ministers have “dual tax status”—they are self employed for payment into the Social Security and Medicare system, but they are employees in most other instances. Therefore, unless the minister qualifies as an independent contractor, his or her wages are reported on Form W-2. This also means he or she is eligible for participation in benefit plans.
If a church treats a minister as self employed for all purposes, and reports compensation on a Form 1099-MISC, it cannot allow the minister to participate in the majority of its fringe benefit plans on a tax-free basis. For example, health insurance premiums paid by an employer for an independent contractor are taxable compensation to the contractor, but the benefit is tax-free to an employee.
Myth #2. If the minister does not have an approved Form 4361 to opt out of Social Security, the employer should allow the minister to have FICA/Medicare taxes withheld from his or her pay and matched by the employer.
People who do not fully understand how the systems work tend to confuse the issues by assuming that if the minister doesn’t have an approved Form 4361, he or she must have FICA withheld from his or her paycheck, like other employees. This is false.
Elaine L. Sommerville explains the careful considerations ministers must make–and the special rules that apply–before choosing to opt out of Social Security.
The truth is, the church shouldn’t be concerned with whether or not a minister has an approved Form 4361, because the minister’s exemption from self-employment tax doesn’t play a role in the how the church treats the minister for tax purposes. Once a church determines an employee is a minister, and that he or she performs ministerial duties, it can never formally withhold FICA/Medicare tax from the compensation paid for such services. If a church withholds FICA/Medicare taxes from a minister’s compensation, it is telling the IRS that the employee is not a minister and is not performing ministerial duties. This means a minister would lose his or her ministerial benefits, including the housing allowance under IRC Sec. 107.
Additionally, since, by law, the minister owes self-employment tax, the IRS has a basis to charge the minister self-employment tax in addition to the FICA/Medicare taxes that may have been incorrectly withheld through his or her employer.
When a minister is properly reported for purposes of paying into the Social Security system, his or her Form W-2 should never have any amounts reported in Boxes 3, 4, 5, and 6.
Lastly, attorney and senior editor Richard Hammar notes that a minister may request the employing church to voluntarily withhold the self-employment taxes. He further explains this approach through this article.
It’s important for churches to clearly understand these concepts. If they don’t, they will be unable to properly report compensation paid to ministers, or help ministers understand their tax obligations.
Responding to Dangerous People in Church
The right words, said the right way at the right time, can help ease tense situations.
Last Reviewed: February 12, 2025
A school bookkeeper in Georgia encountered a gunman with an assault rifle in the school building. She tried to keep the man calm by talking to him respectfully, and persuaded the gunman to put down his gun and turn himself in, according to her statements in an ABC News article.
“When confronting a suspicious person, what you say is important, but how you say it is paramount,” Lee A. Dean writes in Dealing with Dangerous People, a resource for church leaders. His words ring true in light of the Georgia story. “The best approach is to speak quietly but firmly and to be respectful of the person’s dignity and humanity. This approach keeps the situation from becoming overly disruptive and also acknowledges the dual needs of protection and redemption.”
To prepare for and protect your church from a gunman, Dr. Jamie Aten offers tips in “What’s Your Church’s Plan for an Active Shooter?“
If a person who seems dangerous enters a church building, Dean suggests the following in Dealing with Dangerous People:
The keys to accomplishing [removing a dangerous person] with minimal disruption and harm are knowing the right time to move, knowing what to say and how to say it, and understanding that physical contact is a last resort.
Should you remove the person or let them stay? Inexperienced security personnel may be tempted to always storm in and drag away a suspicious person. That’s not the right course of action, says [Dale] Annis, [founder of Church Security Services].
Annis says he recently has received “a dozen” reports around the country of people walking onto the stage and taking over a worship service. If the disruptive person is violent, that person needs to be quickly removed. If the person is nonviolent, the pastor may simply declare that the service is over and ask worshipers to quietly file out of the building. “While this is going on, our team members cordon the guy off and continue to ask everybody else to leave,” says Annis. “This way, we’re taking away his audience.”
But in most other circumstances, action is necessary. When weapons are observed or when someone makes a specific threat to the church or its people, action must be taken immediately. If the suspicious person has mingled among a larger group of people, action may be warranted.
“The first thing is to make a request that the person move away from the general population,” says [Michael] Hodge, [president and owner of Michael A. Hodge and Associates, a security management consulting firm]. “If they refuse to do so, that’s a red flag that this is a serious issue.”
Richard Hammar wrote about a time when a church restrained a disruptive woman during a church service and offers some options for churches to consider.
Property Disputes Between Local Churches and Denominations
What to consider when your church gets into a dispute with its denomination over property.
Loading the player...
What Conceal Carry Weapons Laws Mean for Churches
Video
Loading the player...
Six Questions to Ask When Exempting a Minister from Social Security
Essential questions and filing tips for ministers seeking a Social Security exemption through Form 4361. Understand the process and make informed decisions.
Last Reviewed: January 10, 2025
A minister’s earnings from performing ministerial duties are considered “net earnings from self-employment” under IRC Section 1402(a)(8). This means ministers are generally classified as self-employed for Social Security and Medicare purposes—even if considered common law employees for other tax purposes.
However, ministers may opt out of the Social Security system by filing Form 4361, Application for Exemption from Self Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners. This article explains the qualifications, filing requirements, and important considerations for this decision.
Key Takeaways:
- Ministers can seek a Social Security exemption by filing Form 4361.
- The exemption is based on conscientious or theological objections.
- Strict filing deadlines and rules apply; late submissions are not accepted.
Who Qualifies for the Exemption?
The exemption is available to ministers, members of religious orders, and Christian Science Practitioners. For ministers, the key qualifications include:
- Being a licensed, commissioned, or ordained minister of a U.S. church.
- The church must qualify as tax-exempt under IRC Section 501(c)(3) and as a church under IRC Section 170(b)(1)(A)(i).
The IRS treats the terms “licensed,” “commissioned,” and “ordained” as interchangeable unless a church’s bylaws distinguish duties by credential level. Ministers should keep a copy of their church’s bylaws in case the IRS requests proof of their role.
Basis for Exemption
The exemption is not granted for financial concerns or doubts about the Social Security system’s viability. Instead, it must stem from a minister’s:
- Conscientious objection or theological opposition to accepting public insurance benefits, such as those provided under the Social Security Act.
Before approving a Form 4361, the IRS contacts the minister to confirm that their beliefs are sincerely held and require the minister to inform their ordaining body of the application.
Filing Deadlines and Process
Ministers must file Form 4361 by the due date of their tax return (including extensions) for the second year after they earned $400 or more in self-employment income from ministerial services. Filing late disqualifies the exemption, with no exceptions.
Steps to file:
- Submit Form 4361 in triplicate with supporting documents (e.g., credentials, church qualifications).
- Mail the form to the address listed on its instructions.
- Use certified mail to retain proof of timely filing.
If the form is not filed correctly or on time, the exemption is denied. Attempts to restart the filing deadline by obtaining new credentials are unlikely to succeed unless accompanied by a documented change in beliefs and churches.
Note: Ministers should retain a copy of the approved Form 4361. The IRS rarely provides replacements, and losing this document can lead to unexpected tax liabilities.
Effective Date and Permanency
In most cases, the effective date of the exemption is the date the minister receives credentials. However, ministers must pay self-employment tax until the IRS approves the exemption. They can later amend returns to request refunds for overpaid taxes, if applicable.
Once granted, the exemption cannot be revoked at the minister’s discretion. It is only nullified if approval was based on incorrect information or financial motives. Congress has occasionally allowed ministers to re-enter the system, but these opportunities are rare, with the last occurring in 1999.
Weighing the Decision Carefully
Opting out of Social Security is a significant and permanent decision. Young ministers should not file Form 4361 solely because it seems like a “good deal.” Filing requires an understanding of the requirements and consequences, including:
- Replacing forfeited retirement, disability, and survivor benefits with alternative plans.
- Being prepared to defend the religious basis for the exemption.
As noted in Church Compensation, Second Edition, ministers should plan ahead to ensure they can cover future financial needs. Waiting until age 60 or older to address these concerns is too late.
FAQs
- What is Form 4361?
Form 4361 allows ministers to apply for exemption from self-employment taxes based on religious objections. - Can a minister revoke the exemption later?
No, the exemption is permanent unless granted under incorrect information. - What happens if a minister files Form 4361 late?
Late filings are not accepted, and the minister remains subject to self-employment taxes. - Does opting out of Social Security affect retirement benefits?
Yes, ministers must independently plan to replace benefits they forfeit by opting out.
Mastering Minutes for Church Business Meetings
Why this task can’t continue to be an afterthought for leaders.
Meeting minutes preserve actions taken during a church meeting for future reference. However, in many churches, the duty to record the minutes becomes the responsibility of an individual with little or no training in recording meeting minutes.
This often means the minutes will be insufficient, or worse, damaging to the church. A worst-case scenario exists where meeting minutes are not kept, therefore jeopardizing the ability of a church to document and demonstrate its actions.
Anyone with a role that involves capturing minutes from a church business or committee meeting should receive basic information on how to record and preserve meeting minutes.
The overall goal is to create a self-contained document to provide evidence of actions taken at a properly publicized, called, and run meeting. Minutes should show the meeting was properly called and noticed, that a quorum existed at the meeting, and that all decisions were approved by the required number of votes by qualified voters attending the meeting, in person, or, if permitted, by proxy. The meeting minutes should accurately report all decisions that occurred during the meeting.
These rules apply to member meetings, meetings of the board of directors (sometimes called a board of elders, a vestry, a session, or a church council), and all committee meetings.
To accomplish this, churches should establish procedures to assist the volunteers and staff members who oversee this vital governance function. These procedures should include guidance in the following areas:
Who records the minutes?
Every state’s nonprofit corporate statute requires a nonprofit corporation to have a corporate secretary. While the statute allows churches to substitute a different name, the duties of the office of secretary in a church must equal or exceed the duties contained in the statute. In some churches, the office is called “Church Clerk,” or something similar. In addition, a church’s bylaws may add additional duties and/or provide details about how the secretary is to perform his/her duties.
The corporate secretary must record and keep minutes from all corporate meetings. The bylaws also usually require the corporate secretary to record minutes from board and committee meetings. In some cases, an assistant secretary may be appointed to assist with these duties, or each committee is authorized to appoint its own secretary. In any instance, it is important for a church to determine if each of its governing bodies has a properly appointed person to be responsible for the minutes of its meetings.
What should the minutes contain?
Training should focus on the information the minutes must contain. The minutes should demonstrate everything that would be necessary to prove that the decisions were made at a properly called and noticed meeting, along with the actions taken. To assist in this education, the church may wish to have its secretary(ies) receive training from the church’s legal counsel.
At a minimum, the minutes should contain:
- Date, time, and place of the meeting
- Who called the meeting
- A copy of the notice given to the meeting participants
- A description of those entitled to vote at the meeting
- The names of all who attended (both members and guests)
- The secretary’s affirmation that a quorum exists, including the number of voters present (in person or by proxy, if permitted) at the meeting and the total number of voters entitled to vote
- The presiding officer’s call to order
- Approval of the last meeting minutes (as modified, if necessary)
- The exact resolutions presented, plus any amendments
- The name of the member introducing the resolution and any second provided to the resolution
- The exact vote on each resolution that was considered (as modified, if applicable)
- The names of all nominees for elected offices
- The exact vote in each election for office
- A copy of any written reports that were received at the meeting
- If an oral report was received without a written report, a brief summary of the oral report
- Adjournment, including time adjourned and/or time for reconvening the meeting
What should the minutes not contain?
Many times minutes contain unnecessary information that may be harmful to the church. The minutes should not contain any discussions between members regarding matters placed before them or any details about the deliberative process that preceded decisions. The minutes should not include the contents of executive sessions, but the minutes should reflect that the members went in and out of executive session. No decisions should be made while in executive session. Executive sessions should be used for discussion about personnel, legal issues, and potential liability issues.
The minutes should not contain any discussions with attorneys, certified public accountants, and insurance adjusters that may be privileged. However, minutes should include decisions made as a result of discussions with attorneys, CPAs, and adjusters.
Securing the minutes
Taking sufficient minutes won’t protect the church if the minutes are not secured. It is not uncommon for minutes to be maintained by individuals and then kept by those individuals off church property. Since minutes are considered permanent documents, the church must establish how the minutes are submitted to the church so they can be secured with other permanent records of the church. If minutes are kept by individuals, then they risk being lost or inadvertently destroyed.
Minutes matter
Minutes matter. They are a record of the church’s history, and often play an important role in future events. Care should be taken to maintain accurate minutes of every meeting of your church.
Frank Sommerville is a shareholder in the law firm of Weycer, Kaplan, Pulaski & Zuber, P.C.in Houston and Dallas, Texas. He also holds a license as a certified public accountant. Elaine L. Sommerville is a CPA and has worked in public accounting for 25 years, primarily focusing on tax compliance aspects of nonprofit organizations. She is currently the sole shareholder of the firm of Sommerville & Associates, P.C. Both serve as editorial advisors for Church Law & Tax Report.
Designating Indefinite Housing Allowances
Explore how indefinite housing allowances and safety nets can help churches avoid administrative oversights.
Q: Approximately 10 years ago, the church board approved a resolution that any minister employed by the church is automatically approved for any housing allowance request. Is that valid?
Are Indefinite Housing Allowance Designations Valid?
Many churches choose not to limit housing allowances to a particular calendar year. For instance, if a church designates $12,000 of its senior pastor’s salary in 2014 as a housing allowance, the resolution could specify that the allowance is effective for calendar year 2014 and all future years unless otherwise provided.
This “indefinite” approach may protect ministers if the board neglects to designate an allowance before the start of a future year. However, it is important to note that this method has not been explicitly considered or approved by the IRS or any court, leaving its validity uncertain.
Why Consider a “Safety Net” Housing Allowance?
To address contingencies like midyear staff changes, delayed designations, or other unforeseen circumstances, churches may adopt a “safety net” designation. This could include a clause stating that a specific percentage (e.g., 40 percent) of each minister’s compensation is designated as a housing allowance for the current and future years unless otherwise specified.
However, these designations should not replace annual housing allowance resolutions for each minister. Instead, they serve as a safeguard to prevent the loss of this important tax benefit due to administrative oversight.
Key Point
Churches should consider implementing a “safety net” housing allowance to protect ministers against the inadvertent failure to designate a timely allowance. While these measures can mitigate risk, they do not replace the need for annual, individual designations for each minister on staff.
Best Practices for Housing Allowance Designations
- Ensure annual housing allowance designations are made for each minister.
- Adopt a safety net resolution to address unexpected changes or delays.
- Consult with a qualified tax professional to ensure compliance with IRS guidelines.
FAQs About Indefinite Housing Allowances
What is an indefinite housing allowance?
An indefinite housing allowance is a resolution that applies to the current and future years without requiring an annual designation, unless otherwise stated.
Is an indefinite housing allowance recognized by the IRS?
No, the IRS and courts have not explicitly addressed or approved the use of indefinite housing allowances, leaving their validity uncertain.
What is a safety net housing allowance?
A safety net housing allowance is a designation that applies to all ministers on staff, often as a percentage of their compensation, to protect against missed or delayed designations.
Should churches rely solely on safety net allowances?
No, safety net allowances should complement, not replace, annual housing allowance designations for each minister.
Conclusion
While indefinite and safety net housing allowances provide safeguards against administrative oversight, they should not replace the annual designation process for each minister. Churches are encouraged to consult resources like the Church & Clergy Tax Guide and work with a tax professional to ensure compliance and maximize the benefits of housing allowances.
How Churches Can Prevent Embezzlement: Key Internal Controls
Practical steps to prevent embezzlement in churches by strengthening internal controls and financial practices.
Last Reviewed: January 26, 2025
Sadly, embezzlement is an all too common problem in churches. Often poor internal controls, such as those listed below, are the reason it occurs.
One person counts church offerings
How embezzlement may occur: This person may remove cash, especially if not in an offering envelope.
Preventative action: Have more than one person count each offering. The more people involved, the lower the risk of embezzlement.
Don’t wait – become a Church Law & Tax Advantage Member today!
No regular turnover or rotation among those counting church offerings
How embezzlement may occur: The same two people count church offerings every week. After a number of years, they agree to remove cash and divide it between them.
Preventative action: A pool of counters should be identified, and each offering should be counted by a randomly selected number of people from this pool.
One person collects the offerings
How embezzlement may occur: An usher collects offerings in the church balcony during each service; while carrying offerings down a stairway to a counting room, he or she pockets all loose bills.
Preventative action: There should be at least two people who collect the offering in the balcony, and they should accompany each other down the stairs to the counting room. Further, these individuals should be rotated.
Offering counts are submitted to the person who deposits the offering
How embezzlement may occur: The counters provide the individual who deposits the offering with a count. This individual disregards the count, withholds several bills unaccompanied by offering envelopes, and then deposits the lower amount.
Preventative action: Different individuals should count and deposit church offerings. A person who neither counts offerings nor deposits them with a bank should be assigned the responsibility of reconciling offering counts with the bank deposit slips.
Offering counts and bank deposit slips are not regularly reconciled
How embezzlement may occur: A church only assigns an employee to reconcile the first offering of each month with a bank deposit slip. The person who deposits offerings is aware of this practice, and embezzles loose cash before depositing offerings from the remaining services of each month.
Preventative action: Offering counts and bank deposit slips should be reconciled for every service. Or, reconcile offering counts with monthly bank statements.
Only one signature is needed to write a check
How embezzlement may occur: A church employee is given sole signature authority on the church’s checking account. The employee pays for a number of personal expenses with this checking account.
Preventative action: At least two signatures should be required for all checks.
Members contribute coins and currency (not checks) without using offering envelopes
How embezzlement may occur: This is one of the major causes of embezzlement. People who embezzle church funds often restrict their activities to cash that was not contributed in an offering envelope. Embezzlers assume that it will be more difficult to detect their behavior under these circumstances, since the church cannot provide these donors with a receipt for their contributions (that will reveal discrepancies).
Preventative action: Churches should provide offering envelopes to all members for each week, and also place them in church pews for easy access. Members should periodically be encouraged to use offering envelopes. While they are not required to substantiate charitable contributions, they do reduce the risk of embezzlement. Also, offering counts should note (as a subtotal) loose cash unaccompanied by offering envelopes. This practice will reveal fluctuations that may indicate embezzlement, and will serve as a deterrent.
Contribution receipts are not issued, or they are issued but members don’t report discrepancies to the church
How embezzlement may occur: A church does not provide members with receipts of their contributions. A church employee embezzles cash (whether or not accompanied by an offering envelope), knowing that the risk of discovery is remote. The same risk exists if a church issues contribution receipts but does not actively encourage members to verify the accuracy of these receipts.
Preventative action: Churches should issue a contribution receipt to each donor, and encourage donors to immediately call to the attention of church leaders any discrepancies between their own records and the amount reflected on the church receipt. Discrepancies should not be reported to the person who prepares contribution receipts.
Offerings are not deposited immediately
How embezzlement may occur: When offerings are not promptly deposited, the risk of embezzlement increases since funds are accessible longer. Further, some people may claim they “reimbursed” themselves out of church funds for unauthorized expenses.
Preventative action: Offerings should be deposited promptly with a bank.
Monthly bank statements are not reviewed by someone having no responsibility for handling cash
How embezzlement may occur: A church bookkeeper writes a check to a fictitious company, then cashes it. The bookkeeper is responsible for reconciling bank statements and does not disclose the embezzlement.
Preventative action: Monthly bank statements should be reviewed by a church official or employee having no responsibility for handling cash or writing checks (ideally, the statements should be sent to this individual’s residence). This form of embezzlement also can be avoided by requiring two signatures on all checks.
Reimbursing employees for travel expenses or purchases of church equipment or supplies without requiring adequate substantiation
How embezzlement may occur: A church employee claims to have purchased equipment for church use, and is reimbursed without substantiation. In fact, the purchase was solely for personal use.
Preventative action: Do not reimburse any employee’s purchase of church supplies or equipment without first obtaining proof that the purchase was duly authorized; also insist on seeing a receipt documenting what was purchased and its price.
Protecting Churches from Embezzlement: Lessons and Strategies
Key strategies and lessons to help churches prevent embezzlement and promote financial accountability.
Last Reviewed: January 26, 2025
Embezzlement remains a significant risk for churches, often resulting from poor internal controls. This real-life case demonstrates the consequences of lax financial practices and the importance of preventative measures.
The Case of Church Embezzlement
A church’s chief financial officer embezzled $850,000 in funds over several years using various fraudulent methods. These included forging signatures, issuing unauthorized checks, and misusing church credit cards. The theft not only caused significant financial loss but also resulted in legal and tax consequences for the perpetrator.
Key Takeaways from the Case
- The defendant used digital signatures of church officers to create false resolutions for increased borrowing.
- Unauthorized checks and personal expenses were concealed during account reconciliations.
- Luxury purchases, including cars and vacations, were made using church funds.
Preventative Measures for Churches
Church leaders can prevent embezzlement by implementing these internal controls:
1. Division of Responsibilities
Sharing or dividing tasks significantly reduces the risk of embezzlement. For example:
- Require at least two signatures for checks above a nominal amount.
- Ensure monthly bank statements are reviewed by someone not involved in cash handling or check writing.
2. Secure Handling of Digital Signatures
Digital signatures and stamps must be stored securely with restricted access. If secure storage is not feasible, avoid using them altogether.
3. Regular CPA Audits
A CPA audit provides a management letter identifying deficiencies in internal controls. This proactive step can help churches address vulnerabilities and prevent misappropriation of funds.
4. Filing Form 3949-A with the IRS
If embezzlement is suspected but the full amount is unknown, churches can file Form 3949-A with the IRS. This allows the IRS to investigate and assess criminal sanctions for unreported taxable income.
Lessons for Church Leaders
Many churches avoid implementing internal controls for fear of offending staff. However, financial accountability should take precedence over hurt feelings. Donors trust that their contributions are used for religious purposes, and churches have a duty to uphold this trust.
Key Internal Controls to Implement
- Require receipts and approvals for all expenses.
- Ensure offering counts and bank deposits are reconciled regularly.
- Educate staff and leaders on financial accountability and fraud prevention.
FAQs
- How can churches prevent embezzlement? Implement internal controls like dividing responsibilities, requiring multiple signatures, and conducting regular audits.
- What is Form 3949-A? It is an IRS form that allows employers to report suspected illegal activity, such as embezzlement, for investigation.
- Why are CPA audits important for churches? They help identify weaknesses in internal controls and reduce the risk of financial fraud.
- What should churches do with digital signatures? Store them securely or avoid using them if secure storage isn’t possible to prevent misuse.
Conclusion
Churches must prioritize financial accountability to prevent embezzlement. Implementing robust internal controls and promoting a culture of transparency can safeguard church funds and maintain donor trust.
Using Comparative Ratios and Benchmarks to Assess Church Finances
Discover how comparative ratios and benchmarks can help evaluate your church’s financial performance against peers.
If you’re ready to go beyond internal comparisons and start looking more broadly at your church’s financial performance, comparative ratios are the next step.
Ratios can be a key indicator of how well a church is functioning in comparison to its peers. Not only is the actual ratio important, but also understanding how it fits in the range of peers, and which churches are included as “peers.”
Comparative Ratios
If your financial information is compared to your peers’, it may be helpful to calculate both the average (mean) and the mid-point (median). The benefit of calculating both the mean and median is to reveal the spread of results in the range. If both the mean and median are numbers that are close together, then most of the ratio results in the range are close together and the average is likely to be very useful. If the mean and median are far apart, then the underlying organizations’ results are spread out and the average is less important.
An individual that works with church ratios extensively finds it useful to show a minimum and maximum in each range. This lets you know how close you are to the top or bottom of the range. Depending on the ratio observed (for example, average salary per full-time equivalent), it may be beneficial to know how close to the high or low your church is in the particular range.
Benchmarks
Another key to properly interpreting the ratios is to understand the demographics of the other participants in the range, beyond the minimum and maximum in the range. It is important to consider how many participants are in the ratio averages your church is using as a benchmark. An average ratio calculated with only a few churches may be much different than one calculated with several churches.
It is also important to benchmark your church against others similar in size and region of the country. For example, property and equipment per full-time equivalent employee may be significantly different for churches in the Midwest than ones on the West Coast, due to higher property costs in the West.
Benchmark against other, similar organizations
Benchmarking against organizations with similar asset sizes may be very misleading because organizations with older properties tend to have smaller property and equipment values due to depreciated property values. Perhaps a better way to group peer organizations is by arranging organizations together that have a similar average number of attendees (excluding children), or by the size of unrestricted charitable contributions.
There are various ways to benchmark your church against other churches. You may do it informally yourself or opt to get outside information.
FAQs:
Q1: What are comparative ratios in church finances?
A: Comparative ratios evaluate how well a church is functioning financially compared to its peers. They provide insights into averages, medians, and ranges within similar organizations.
Q2: Why is it important to calculate both the mean and median when comparing ratios?
A: Calculating both helps reveal the spread of results. If the mean and median are close, the average is useful. If they are far apart, it indicates a wide range of results, making the average less reliable.
Q3: How can benchmarking improve financial analysis for churches?
A: Benchmarking helps compare your church’s financial metrics with similar organizations, considering factors like size, region, and property costs. This ensures more accurate and relevant comparisons.
Q4: Why should churches consider regional differences when benchmarking?
A: Regional differences, such as property costs, can significantly affect financial metrics. For example, West Coast churches often have higher property costs than Midwest churches, impacting benchmarks like property per full-time employee.
Q5: What is the benefit of including minimum and maximum values in ratio ranges?
A: This helps identify how close your church is to the top or bottom of a range. And this information provides better context for financial performance.
Q6: What are some common ways to group churches for benchmarking?
A: Churches can be grouped by attendee numbers, region, or unrestricted charitable contributions. Avoid grouping solely by asset size, as depreciated property values may skew results.
Q7: How can churches access external benchmarking data?
A: Churches can benchmark informally by comparing metrics on their own or by obtaining data from external sources that specialize in church financial benchmarks.
Should Clergy Car Repair Reimbursements Be Taxed?
Determine if clergy car repair reimbursements qualify as taxable income based on IRS and church guidelines.
Last Reviewed: January 8, 2025
Q: I need help with a question regarding money requested for our Deaf Church Pastor for car repairs. The Deaf Church Committee voted to reimburse him for the car repairs but since this is not an actual church expense, it seems it should be considered a gift, and therefore taxable income. Their position is that it is a reimbursement and therefore not taxable. Help?
What Determines the Taxability of Clergy Reimbursements?
The answer largely depends on whether your church has adopted an accountable reimbursement plan. According to the IRS guidelines for reimbursement plans, these plans allow clergy to receive funds for business-related expenses without them being treated as taxable income. Here’s an explanation based on the Church & Clergy Tax Guide:
How Do Accountable Reimbursement Plans Work?
Under an accountable reimbursement plan, church reimbursements for employee business expenses are not reported as compensation on the employee’s Form W-2 or Form 1040. They are also not considered when computing automatic excess benefits. Adopting an accountable plan is a crucial element for handling clergy and employee expenses correctly.
To qualify as an accountable plan, the following four criteria must be met:
- Business Connection: Expenses must have a direct connection to performing services as a church employee.
- Adequate Accounting: Employees must account for expenses within a reasonable timeframe (not more than 60 days).
- Returning Excess Reimbursements: Employees must return any excess reimbursement within a reasonable timeframe (not more than 120 days).
- Reimbursements Not Made From Salary Reductions: Reimbursements must come from church funds, not by reducing the employee’s salary.
Are Reimbursements Without an Accountable Plan Taxable?
In the absence of an accountable plan, reimbursements are typically considered taxable income. They must be reported on the employee’s Form W-2 and are subject to federal income tax withholding, Social Security, and Medicare taxes.
For example, if your Deaf Church Pastor’s car repair expenses are reimbursed without an accountable plan in place, this amount is treated as taxable income, regardless of whether the church committee considers it a reimbursement or a gift.
How Should Churches Handle Clergy Expenses?
To avoid confusion and ensure tax compliance, churches should implement an accountable reimbursement plan that adheres to IRS guidelines. This allows reimbursements to be excluded from taxable income while providing a clear structure for expense reporting.
FAQ Section
1. What is an accountable reimbursement plan?
An accountable reimbursement plan is an arrangement where employers reimburse employees for business-related expenses, provided specific IRS requirements are met.
2. Are gifts to clergy taxable?
Gifts to clergy are generally taxable unless they are classified as tax-exempt under specific circumstances, such as benevolence or charity.
3. Can car repair expenses qualify as business expenses?
Yes, if the car is used for business purposes related to clergy duties, such as traveling to multiple congregations or events.
4. What happens if a reimbursement plan isn’t accountable?
Reimbursements are treated as taxable income and must be reported on the clergy’s tax filings.
Conclusion
Properly categorizing and managing clergy reimbursements, including car repairs, is essential for tax compliance. Churches are encouraged to adopt accountable reimbursement plans to avoid tax implications and ensure clarity in financial transactions.
Can Churches Refund Charitable Contributions?
Can a church refund charitable contributions? Discover legal considerations and best practices for handling refund requests.
Last Reviewed: January 24, 2025
Q: One of our board members gave the church a gift of $10,000 with no strings attached (his words). The church provided him with a contribution receipt. We had hoped to put that money toward a building project. Recently, the donor asked if he could have the money back for three months for an investment. Are we legally obligated to return his gift?
Understanding Charitable Contributions
Most church leaders eventually face a request from a member to refund a charitable contribution. These requests often arise due to financial hardship or unexpected personal needs. While the situation may evoke empathy, it also presents complex legal and ethical considerations.
Legal Perspective on Charitable Contributions
A charitable contribution is a gift of money or property to a charitable organization. Under the law, this is considered an irrevocable transfer of the donor’s entire interest in the donated funds or property. Since the donor relinquishes all ownership rights upon donation, it generally is not legally possible to recover the donated property.
Undesignated Contributions
In many cases, contributions are undesignated, meaning the donor does not specify how the funds should be used. For example, weekly contributions to a church’s general fund fall under this category. Undesignated contributions are unconditional gifts, and as such, the church has no legal obligation to return them. Returning these funds could also create legal and operational complications.
Key Considerations for Churches
Churches should carefully consider their response to refund requests, keeping the following in mind:
- Irrevocable Nature: Contributions are legally defined as irrevocable gifts. Once donated, the funds belong to the church.
- No Legal Obligation: Churches are not legally required to return undesignated contributions, even in emergencies.
- Seek Legal Counsel: If a church is considering returning a contribution, it is crucial to consult with legal counsel to understand potential risks and implications.
Potential Risks of Refunds
Returning contributions can lead to several issues, including:
- Mismanagement claims by other donors.
- Loss of trust in the church’s financial stewardship.
- Increased administrative complexity and legal exposure.
Best Practices for Handling Refund Requests
Churches should establish clear policies for charitable contributions to guide their responses to refund requests. These policies should include:
- Transparency: Communicate the irrevocable nature of contributions to donors during the giving process.
- Documentation: Maintain detailed records of all contributions and their intended purposes.
- Legal Guidance: Consult legal counsel before making decisions on refunds, especially for large sums.
FAQs on Refundable Charitable Contributions
- Q: Can a donor legally reclaim a charitable contribution?
A: No, donations are typically irrevocable under the law once transferred to the charity. - Q: Should churches refund contributions under financial hardship?
A: While it may be tempting, it is best to consult legal counsel before making exceptions. - Q: Can donors specify a purpose for their contributions?
A: Yes, designated contributions are allowed but must align with the church’s mission and comply with legal guidelines. - Q: How can churches avoid future refund requests?
A: Communicate policies clearly and provide education about the irrevocable nature of charitable contributions.
For more guidance, refer to chapter 8 of Richard Hammar’s Church & Clergy Tax Guide.
The Deductibility of Pastors’ Business Expenses and Substantiation Requirements
Pastors must meet strict substantiation requirements to claim deductions for business expenses like home offices and travel.
Last Reviewed: January 10, 2025
Pastors must meet strict substantiation requirements to claim deductions for business expenses like home offices and travel.
Pastors face unique challenges in claiming business expense deductions, including the need to meet strict substantiation requirements. This article explores a Tax Court case highlighting these rules and offers practical insights for pastors navigating similar issues.
- Strict substantiation rules apply to certain expenses, such as travel, meals, entertainment, and listed property.
- Pastors claiming home office deductions must demonstrate exclusive and regular use of the space for business purposes.
- Self-employment status can play a role in determining eligibility for deductions.
Case Overview: Business Expenses and Substantiation Rules
A church provided its pastor with an office on campus and a $12,000 annual housing allowance. The pastor also used a home office, dedicating one room (approximately one-third of his rented home) for work-related activities. Expenses included computer supplies, books, and other items not reimbursed by the church. The pastor reported these expenses on his Schedule C as an independent contractor.
After the IRS denied several deductions, the pastor appealed to the United States Tax Court, which evaluated the case under strict substantiation requirements.
Strict Substantiation Requirements Explained
The Tax Court emphasized the importance of maintaining detailed records for certain expenses:
- Travel, Meals, and Entertainment: Taxpayers must provide adequate records proving amounts, times, places, and business purposes.
- Home Office Expenses: Deductible only if the space is used exclusively and regularly for business purposes.
- Receipts: Required for individual expenses of $75 or more.
The “Cohan rule” allows for some estimated deductions if evidence exists, but stricter rules under section 274 of the tax code apply to specific expense categories.
Key Decision Points
Home Office Deduction
The pastor claimed a deduction of $8,546 for home office expenses, calculated as one-third of his total housing costs. The Tax Court upheld the deduction, citing:
- The space was used exclusively for business activities.
- The home office served as the focal point for his non-church-related professional activities.
Unsubstantiated Expenses
Many other claimed deductions, including supplies, meals, and entertainment, were disallowed due to insufficient documentation. The court noted that strict substantiation rules were not met.
Lessons from the Case
This case highlights several important points for pastors:
- Maintain detailed and accurate records to substantiate all deductions.
- Home office deductions require exclusive and regular use for business purposes, especially if additional office space is provided by the church.
- Self-employment status can influence eligibility for certain deductions, such as home office expenses.
FAQs: Substantiation Requirements for Pastors
1. What are substantiation requirements?
They are IRS rules requiring detailed records, such as receipts and logs, for specific expenses to support deductions.
2. How do substantiation rules affect home office deductions?
Pastors must prove exclusive and regular use of the space for business purposes to qualify for the deduction.
3. Are estimated expenses allowed?
The “Cohan rule” permits estimates in some cases, but strict categories like travel and meals require detailed documentation.
4. How can pastors prepare for audits?
Keep thorough records, including receipts and detailed logs, for all claimed expenses, especially those subject to strict substantiation.
Meeting IRS substantiation requirements is critical for pastors claiming business expense deductions. Accurate records and understanding applicable rules can help minimize the risk of denied deductions and audits.
When to Designate a Pastor’s Housing Allowance: Key Guidelines
Understand when to designate a pastor’s housing allowance and comply with IRS rules effectively.
Last Reviewed: September 3, 2025
Too Late to Designate?
Question: We have just discovered that our church failed to designate a housing allowance for our pastor. The pastor wants the board to adopt a resolution designating a percentage of his compensation as a housing allowance, and backdating it to January 1 of this year. Is this permissible?
Can a Housing Allowance Be Designated Retroactively?
Many churches face this situation: failing to designate a housing allowance by the end of a calendar year and realizing the omission weeks or months into the new year. Unfortunately, according to IRS regulations, housing allowances cannot be designated retroactively. A housing allowance “means an amount paid to a minister to rent or otherwise provide a home if such amount is designated as rental allowance pursuant to official action taken … in advance of such payment by the employing church or other qualified organization” (Treas. Reg. 1.107-1(b)).
A housing allowance can be designated any time of year. It just cannot be applied retroactively—only prospectively (from that point forward).
Why Retroactive Designation is Prohibited
- Prospective Application Only: Housing allowances are nontaxable only when used to pay for housing expenses. Allowing retroactive designations would compromise this principle, as expenses could have already been incurred without a valid allowance in place.
- IRS Compliance: A housing allowance must be designated before payment to remain compliant with IRS regulations.
What Are the Consequences of Falsifying Designations?
Falsifying housing allowance designations to appear compliant may lead to severe repercussions. For example:
- Legal Violations: Falsified designations could violate the federal Sarbanes-Oxley Act, resulting in criminal penalties.
- Loss of Tax-Exempt Status: Noncompliance may jeopardize the church’s tax-exempt status.
How Can Churches Prevent This Issue?
To avoid missing housing allowance designations in the future, churches should consider these steps:
- Plan Ahead: Ensure designations are made before the calendar year ends or before the first paycheck of the year.
- Document Clearly: Use a formal resolution and include clear terms about the percentage or amount designated.
- Regular Reviews: Conduct annual reviews to ensure compliance with IRS guidelines.
Sample Resolution for Housing Allowance Designation
Not sure how to draft a housing allowance resolution? See our ready-to-use sample for guidance.
FAQs About Housing Allowance Designations
What is a housing allowance? A housing allowance is a portion of a minister’s compensation designated to pay for housing expenses, and it is exempt from income tax under IRS regulations.
Can a housing allowance be set mid-year? Yes, it can be set at any time of year. It must be done in the same manner as one set entering a new calendar year, but only applies from the date it is approved and going forward.
Can a housing allowance be changed mid-year? Yes, a housing allowance can be adjusted mid-year, but only for payments made after the adjustment is approved.
What expenses qualify for a housing allowance? Qualifying expenses include rent, mortgage payments, utilities, and furnishings, among others directly related to the minister’s housing.
Is a housing allowance taxable? Housing allowances are not taxable for federal income tax but are subject to self-employment taxes.
By understanding and adhering to these guidelines, churches can ensure compliance with IRS rules and protect both their financial integrity and their pastors’ benefits.