Understand when to designate a pastor’s housing allowance and comply with IRS rules effectively.
Too Late to Designate?
Question: 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?
Can a Housing Allowance Be Designated Retroactively?
Many churches face this situation: failing to designate a housing allowance by the end of a calendar year and realizing the omission weeks or months into the new year. Unfortunately, according to IRS regulations, housing allowances cannot be designated retroactively. 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” (Treas. Reg. 1.107-1(b)).
Why Retroactive Designation is Prohibited
- Prospective Application Only: Housing allowances are nontaxable only when used to pay for housing expenses. Allowing retroactive designations would compromise this principle, as expenses could have already been incurred without a valid allowance in place.
- IRS Compliance: A housing allowance must be designated before payment to remain compliant with IRS regulations.
What Are the Consequences of Falsifying Designations?
Falsifying housing allowance designations to appear compliant may lead to severe repercussions. For example:
- Legal Violations: Falsified designations could violate the federal Sarbanes-Oxley Act, resulting in criminal penalties.
- Loss of Tax-Exempt Status: Noncompliance may jeopardize the church’s tax-exempt status.
How Can Churches Prevent This Issue?
To avoid missing housing allowance designations in the future, churches should consider these steps:
- Plan Ahead: Ensure designations are made before the calendar year ends or before the first paycheck of the year.
- Document Clearly: Use a formal resolution and include clear terms about the percentage or amount designated.
- Regular Reviews: Conduct annual reviews to ensure compliance with IRS guidelines.
Sample Resolution for Housing Allowance Designation
Not sure how to draft a housing allowance resolution? See our ready-to-use sample for guidance.
FAQs About Housing Allowance Designations
What is a housing allowance? A housing allowance is a portion of a minister’s compensation designated to pay for housing expenses, and it is exempt from income tax under IRS regulations. Can a housing allowance be changed mid-year? Yes, a housing allowance can be adjusted mid-year, but only for payments made after the adjustment is approved. What expenses qualify for a housing allowance? Qualifying expenses include rent, mortgage payments, utilities, and furnishings, among others directly related to the minister’s housing. Is a housing allowance taxable? Housing allowances are not taxable for federal income tax but are subject to self-employment taxes.
By understanding and adhering to these guidelines, churches can ensure compliance with IRS rules and protect both their financial integrity and their pastors’ benefits.
