Background. Many ministers belong to local clubs, including fitness and golf clubs. Some churches agree to pay the annual dues or fees to these clubs as a fringe benefit. In some cases, the church treats the club dues as a business expense because a minister’s membership in the club will either contribute to his or her health or expose the minister and church to the community.
New IRS regulations. The issue of club dues was addressed by last year’s tax reform law, and by proposed regulations released by the IRS last month. Under the new tax law and IRS regulations dues paid for membership in any club organized for business, pleasure, recreation, or other social purposes cannot be claimed as a business expense—other than dues paid to professional organizations such as bar associations and medical associations, and civic or public service organizations such as Kiwanis, Lions, and Rotary. As a result, dues paid to health and fitness clubs, golf clubs, airline and hotel clubs, and dinner clubs are no longer deductible as a business expense.
Key point. The fact that membership in a club may enhance a minister’s health or length of ministry, or provide positive exposure of the church in the community, does not matter. These dues are not business expenses.
There are two points to emphasize:
• Reimbursements. Since most club dues no longer can be treated as a business expense, a church cannot pay for or reimburse such dues under an accountable expense reimbursement arrangement. If a church pays for a minister’s club dues, then the full amount must be added to the minister’s W-2 or 1099 form as additional taxable compensation. It is not a business expense that is reimbursable under an accountable arrangement.
• Deductions. Second, ministers cannot claim a business expense deduction for unreimbursed club dues that they pay themselves.
Significance to church treasurers. What is the significance of the new law and regulations to church treasurers? Consider the following:
• Re-evaluate current practices. If your church pays a pastor’s dues to one or more local clubs, now is the time to re-evaluate your practice in light of the new IRS regulations.
• If you have an accountable reimbursement arrangement. If your church has an accountable business expense reimbursement arrangement, it cannot pay for or reimburse (under such an arrangement) dues it pays on behalf of a pastor to clubs organized for pleasure, recreation, or other social purposes. This includes dues paid to health and fitness clubs, golf clubs, airline and hotel clubs, and dinner clubs. If the church pays or reimburses these dues, then the full amount paid by the church must be reported as additional income on the pastor’s W-2 or 1099.
• Some dues may be treated as a business expense. Dues paid to professional organizations and civic or public service organizations (such as Kiwanis, Lions, and Rotary) can be treated as a business expense if they otherwise qualify.
• Examples. Consider the following examples:
Example. A church board adopts an accountable business expense reimbursement arrangement. The board agrees to pay its pastor’s club dues at a local fitness club. These dues are $1,500 each year. Since the dues cannot be treated as a business expense, they cannot be reimbursed under an accountable expense reimbursement arrangement. As a result, the church must include the full $1,500 as additional income on the minister’s W-2 at the end of the year, and the minister must report the full amount as additional income on Form 1040.
Example. Same facts as the previous example, except that the minister’s club dues were not reimbursed by the church. The key point to note here is that the minister will not be able to deduct any part of the dues as a business expense. They are a nondeductible personal expense.
• Final thought. Since fitness and recreational club dues no longer are treated as a business expense, some churches may elect to discontinue paying them. While churches no longer can reimburse such expenses under an accountable expense reimbursement arrangement, there is no reason why a church cannot continue to pay these kinds of dues so long as it properly reports the full amount as additional taxable income. Payment of these dues by the church becomes a taxable fringe benefit.
This article originally appeared in Church Treasurer Alert, October 1994.