Q&A: Too Late to Designate?

We failed to allocate a portion of our pastor’s salary for housing. Is it too late to do so for this entire year?

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?
Many churches fail to designate a housing allowance by the end of a calendar year for a variety of reasons and discover the omission a few weeks or months into the new year. Is it too late to do so for that year? According to IRS regulations, the church can still designate a housing allowance for the minister for the remainder of the new year. The regulations state that 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” (emphasis added). Treas. Reg. 1.107-1(b).
As a result, a housing allowance only operates prospectively, never retroactively. This principle is a corollary of the requirement that a housing allowance is nontaxable only to the extent that it is used to pay for housing expenses. This requirement would be compromised if housing allowances could be designated retroactively, after housing expenses are incurred and paid. In such a case, some or all of the allowance would not be used to pay for housing expenses.
There is one additional point to note. Falsification of housing allowance designations may constitute a violation of the federal “Sarbanes-Oxley Act” which could result in criminal penalties.
Not sure what goes into a housing allowance resolution? See this ready-to-use sample.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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