Church treasurers often are confused over the proper handling of commuting expenses of church staff. What is commuting? What if a pastor stops at the hospital to visit a member on the way home? Is this commuting? What if a staff member makes more than one round-trip between home and the church in one day? Are both trips commuting? Are commuting expenses business expenses? Can they be reimbursed by the church? What is the best way for a church to treat these kinds of expenses? How should the church report reimbursements of commuting expenses?
Commuting—what is it?
Commuting refers to travel between one’s home and regular place of work. The income tax regulations state that commuting expenses are personal expenses and do not qualify as business expenses. This is so even if a worker is required to make more than one round-trip between home and work in one day. For example, if a minister must return to the church in the evening for a board meeting, this trip is commuting. A commuting trip does not become a business expense just because work is done in the car.
Trips between church and a second “business location”
Clergy and other church staff often travel between church and another business location in the community. For example, a pastor leaves the church to visit someone in a local hospital. Or, a church staff member travels from the church to a local store to purchase church supplies. These trips, from the church to a second business location, are business-related. This means that the expenses incurred in making such trips may be deductible as a business expense by the worker, or may be reimbursed by the church if it has established a business expense reimbursement arrangement.
Tip.The most desirable arrangement is for a church to establish an accountable business expense reimbursement arrangement. A reimbursement arrangement is accountable if
- workers are reimbursed only for those expenses that they properly substantiate (as to amount, place, location, and business nature), and
- workers are required to return excess reimbursements to the church.
Under such an arrangement, the reimbursements are not reportable as taxable income to the workers (on their W-2 forms), and the workers have no deductions to claim. They are reporting to the church rather than to the IRS. But remember, unsubstantiated statements as to the amount of their business expenses is not enough. They must not be reimbursed unless they have sufficient substantiation as to support a deduction on their tax return. For a copy of a board resolution adopting an accountable reimbursement arrangement, see chapter 6 of Richard Hammar’s Church and Clergy Tax Guide (available from the publisher of this newsletter).
- Trips between a second business location and home
- What happens if a minister travels from church to a hospital to make a call, and then goes directly home from the hospital? Is this entire trip commuting, or simply a part of it? The miles from the church to the hospital are business-related, but the miles from the hospital to the minister’s home are non-deductible commuting expenses.
Example. Rev. C is an associate minister at her church. Her home is 5 miles from church. Her round-trip commutes between her home and the church are personal commuting miles, and are never deductible. If the church has adopted an accountable business expense reimbursement arrangement, these expenses are not reimbursable since they are not business-related. If the church reimburses these expenses anyway, the full amount of the reimbursements must be included on Rev. C’s W-2 (or 1099) as taxable income. In the future, reimbursement of personal miles should be discouraged, even if the reimbursements are reported as taxable income.
Example. Same facts as the previous example. Assume that Rev. C leaves work early one afternoon to call on several persons in a local hospital that is 3 miles from the church, and only 2 miles from Rev. C’s home (the hospital is between Rev. C’s home and the church). The miles between the church and hospital are business miles, and may be reimbursed by the church under a business expense reimbursement arrangement even though Rev. C has travelled 3 miles closer to her home. However, the remaining 2 miles between the hospital and Rev. C’s home are personal miles and are not reimbursable as business expenses.
Example. Same facts as the previous example, except that the hospital is 3 miles from the church and 8 miles from Rev. C’s home. The entire 8 miles in travelling home from the hospital represent personal miles. On the other hand, if Rev. C returns to the church following her visit at the hospital, then these 3 miles would be business-related, and the only the remaining 5 miles to Rev. C’s home would be personal.
- Church reporting
- If the church has adopted an accountable business expense reimbursement arrangement, then it can reimburse business miles incurred by church staff at the current IRS-approved standard mileage rate of 28 cents per mile, or at any other rate the church chooses. However, if your church reimburses a staff member at a higher rate than the IRS-approved rate (28 cents per mile for 1993), then the amount of the reimbursements in excess of the 28 cent rate must be reported as taxable income in box 10 of the workers’ W-2 forms (and in boxes 12 and 14 for non-minister employees).
- In addition, box 17 of the W-2 form must report code “L” followed by the amount of reimbursements up to the 28-cent approved limit. Churches that reimburse mileage without adequate substantiation (a “nonaccountable” arrangement) must report all of their reimbursements as income on the workers’ W-2 forms. Workers who have unreimbursed transportation expenses, or expenses reimbursed under a nonaccountable arrangement, may be able to deduct some or all of their expenses on Schedule A (if an employee) or on Schedule C (if self-employed).