U.S. tax law provides that congregations and other organizations employing ministers and other religious professionals may consider certain items as usual business expenses. Such expenses are not included in the compensation paid to individuals; they are part of the necessary expenses of the organization and are not reported for income tax purposes.
- Items of enduring value purchased with non-taxed professional expense funds are the property of the congregation. Such items may subsequently be purchased at their fair market value by the employee. Alternatively, the fair market value can be imputed on the employee's final paycheck so that the employee pays appropriate taxes on the items' value.
- The items below are allowable as professional expenses. However, basics that a staff member needs in order to perform their job should be funded through an appropriate budget line. (For instance, an employee should not need to pay for their office supplies or furniture through their professional expenses.)
- Under an Accountable Reimbursement Plan, unused professional expenses may not be converted to salary. According to IRS rules, allowing an employee to take their leftover professional expenses as salary nullifies their Accountable Reimbursement Plan, which then makes the entire amount of their expense line taxable. (See Reimbursement Policies, below, for more on Accountable Reimbursement Plans.)
- Automobile expenses while on official business (such as to meetings, hospital or home visits, trips for educational purposes or to purchase supplies, travel with a youth group or a church school class, etc.) are reimbursable at the standard mileage rate in effect at the time. The costs of commuting to and from home to work are not allowable as business automobile expenses.
- Travel expenses while away from home overnight for work or business, including air fare, taxis, rental automobiles, lodging, meals, and incidentals are all professional expenses. This includes costs to attend professional conferences. (The IRS disallows travel expenses for spouse unless there is a bona fide business purpose.)
- Entertainment expenses directly related to the mission or programs of the organization are considered professional expenses. These may include entertainment at home or in restaurants of members or potential members of the congregation.
- Books and journals acquired and used for professional purposes may be treated as business expenses.
- Computers and related equipment costs may be treated as a business expense through a Section 179 deduction if the items are used 50% or more for professional activities. It is customary today to consider computers and peripherals as essential for the performance of one's duties.
- Educational expenses such as tuition, books, and supplies are professional expenses if related to one's professional status or responsibilities, or to maintain skills needed in one's work. Travel solely for entertainment cannot be treated as a professional expense. Travel in connection with educational activities, conferences, or worship services will usually be legitimate. Please note:
- Some Jewish and Christian groups have considered travel to the Holy Land as inherently inspirational and valid as serving a religious purpose, but this practice has come under IRS scrutiny.
- Where the purpose of travel is both personal and business, the expense may be pro-rated as partly a business expense and partly a personal one.
- Some employer/congregations have included reimbursement for expenses necessary to the overall physical, mental, and spiritual wellbeing of staff in this category of church expenses. We recommend that such items be addressed through a Section 125 flexible benefit plan or a health reimbursement arrangement.
- Dues for membership in professional organizations are legitimate expenses.
- Telephone expenses, except for the basic charge for a home phone, may be counted as business expense if related to the performance of one's duties.
- Religious garments or robes may be purchased and cleaned with funds for professional expenses, but this does not apply to garments worn as ordinary clothing.
- Insurance premiums for malpractice insurance or coverage of business equipment may be legitimate expenses. (These are often covered through the congregation's insurance package.)
- Office supplies such as stationery, letterhead, etc. are legitimate business expenses.
By tradition, some religious organizations have made fixed sum monthly payments to their minister or other staff for a "travel allowance" and have not requested an accounting for how the money was spent. U.S. tax law does not permit professional expense funds to be paid to employees as unreported or tax-free income.
Expense moneys paid other than through an Accountable Reimbursement Policy should be reported to the IRS as "other income" on Form W-2, and then may be claimed by the taxpayer as itemized deductions on Schedule A or Schedule C of the 1040 tax return.
It is strongly recommended that the congregation establish an Accountable Reimbursement Policy. Under such a policy, staff is reimbursed within 30 to 60 days for expenses advanced on behalf of the congregation, with reasonable documentation where appropriate. IRS regulations specify that receipts should be provided for expenses over $75. One way of segregating business expenses is for the staff member to charge them to a credit card used solely for this purpose. The church then pays the credit card statement as it would any other monthly expense, although the credit card statement in and of itself may not be sufficient documentation.
Any excess funds that have been advanced to a professional or employee for a trip or special purpose must be reimbursed back to the congregation within 60 days or should be declared as additional income.
It is important to avoid confusion with other checks received by staff, such as for cash salary or a clergy housing allowance. Reimbursement of professional expenses should not be included in checks for those items.
About tax law and advice. While this information is believed to be accurate, the staff of the Office of Church Staff Finances are not qualified tax consultants. We urge congregations and professionals to consult tax specialists or accountants.
We also recommend that churches obtain references such as the Church and Clergy Tax Guide, (800) 222-1840. This is the most comprehensive guide to the subject for non-experts. The same author also publishes Church Laws & Tax Report, a bimonthly journal reporting on legal and tax developments affecting ministers and churches.
As tax laws in Canada may differ from those in the U.S., Unitarian congregations in Canada should contact the Canadian Unitarian Council for information about professional expenses there.