Adopt and follow an accountable expense reimbursement plan

Adopt and follow an accountable expense reimbursement plan

Many ministers personally spend hundreds or thousands of dollars each year on churchrelated business expenses. For example, a minister might pay for gas while traveling on church business, registration fees for a ministry-related conference, or pick up supplies on the way to a church dinner.

An accountable expense reimbursement plan, in which expenses with appropriate substantiation are fully reimbursed to the minister by the church, is the best form of stewardship.

To qualify for reimbursement, an expense must be both ordinary and necessary. An “ordinary” expense is one that is common and accepted in someone’s profession, while a “necessary” expense is one that is helpful and appropriate in the context of a person’s work. So, while a minister could certainly be reimbursed for the cost of ordering books on theology to research a sermon, he or she would not, for instance, be entitled to reimbursement for buying a detective novel to read on a plane.

Because reimbursements are essentially the church paying money owed to the minister, they should not be considered part of a minister’s taxable salary. Rather, reimbursements are part of a church’s operating expenses, which in this case were initially paid by the minister. When a church lists reimbursements as part of a minister’s compensation package, it gives a distorted picture of what the minister is actually receiving in return for his or her work.

By the same token, it is important that a congregation NOT treat expenses that are really part of a minister’s compensation as church-related expenses. For instance, while a church could reimburse a minister’s restaurant bill from leading a breakfast Bible study group, meal expense would not be reimbursable if the minister were simply getting something to eat on a lunch break or having a purely social meal with members of the congregation.

Even if the church reimburses a minister for a personal expense, that does not suddenly make it a “business expense” in the eyes of the IRS. Business expenses are business expenses whether or not they are reimbursed, while personal expenses are always nondeductible and non-reimbursable. If a personal expense is inadvertently reimbursed by the church, then the minister should immediately refund the money. Otherwise, the church should include the amount of the reimbursement in the minister’s taxable wages on Form W-2.

In the end, there are only two valid ways to deal with ministry-related expenses. The first is for the minister to try to take a federal income tax deduction for unreimbursed expenses 8 Essentials of Compensating Ministers 9 from personal income at tax time. The second is for the minister to provide the church with an accounting of the expenses and for the church to reimburse the minister. Reimbursement is almost always the better option in terms of saving on taxes.

For reimbursements to be excluded from taxes, the minister must provide a detailed accounting. As far as the IRS is concerned, reimbursements paid without proper accounting are simply additional taxable income. To avoid taxes on expense reimbursements, the IRS requires three basic elements:

(1) a business purpose for the expenses,

(2) substantiation of expenses such as a receipt, and

(3) the five W’s noted on the back of the credit card slip or other receipt:

– Why (noting the business purpose),

– What (description, including itemized accounting of cost – which is standard on most receipts),

– When (date),

– Where (location), and

– Who (names of those for whom the expense was incurred).

Failure to keep adequate records of expenses can be problematic should the church or minister ever find themselves audited. Whatever the specifics of the church’s policy, providing ministers with full reimbursement for all reasonable ministry-related expenses should be the goal. Anything less is poor stewardship on the part of the church. Establishing an accountable reimbursement plan is the best option.