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.
