Q: More churches have allowed pastors and employees to work from home one or more days a week. For income tax purposes, can those individuals deduct the business expenses they incur while working from home?
In general, employees can no longer deduct unreimbursed business expenses from their personal income tax returns for income tax purposes.
That’s because of provisions contained in the Tax Cuts and Jobs Act of 2017.
But that doesn’t mean churches can’t help pastors and staff with their home office expenses.
Two key points come to mind:
First, for ministers, remember that they are treated uniquely under the tax code. They have “dual tax status,” meaning they are treated as employees for income tax purposes, but they are treated as self-employed for purposes of Social Security and Medicare (the Self Employed Contributions Act, or SECA).
Because of this unique status, ministers still may be able to deduct their unreimbursed business expenses in arriving at their net income subject to self-employment tax. They should consult with qualified tax counsel to further explore this possibility.
And second, churches that allow, or perhaps even require, ministers and staff members to work from home in some capacity should recognize that the costs for equipment and supplies used by these individuals may constitute valid business expenses.
Expenses incurred by an employee for supplies and equipment used exclusively in connection with his or her employment are typically valid business expenses that can be reimbursed tax-free by the employer under an accountable reimbursement arrangement.
Advantages to reimbursements
There may be additional advantages to reimbursing some of these expenses. Requiring a certain type of computer or laptop may make sense for cybersecurity and productivity purposes.
Covering all or part of the monthly internet service may make sense for ensuring minimum speeds required by the employer for video calls and other activities requiring large bandwidth.
Other costs that may qualify include office supplies, a printer, a scanner, and, depending on the circumstances, office furniture.
But two cautions should be noted:
Pastors and employees: Remember that if the employer pays or reimburses the cost for furniture or equipment, the employer owns the items purchased. So, individuals have a responsibility to steward these items well—and recognize that they will need to return them if their employment ends.
Churches: Remember that reimbursements have a budgetary impact. But also remember that reimbursing employees for costs they incur for required elements of their job is very helpful to them financially … and generally not taxable.