A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. A minister living in a parsonage qualifies for a housing allowance to the extent of his own out-of-pocket costs. The minister’s church or other qualified organization must designate the housing allowance pursuant to official action taken in advance of the payment. The IRS lists only food and servants as prohibitions to allowable housing expenses. If a minister owns a home, the amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following three amounts:

1. The amount actually used to provide a home.
2. The amount officially designated as a housing allowance.
3. The fair rental value of the home.

Allowable Housing Expenditures:

• Total mortgage payments (Be careful not to duplicate amounts included below under “real estate taxes” and “homeowner’s insurance”)
• Real estate taxes
• Homeowner’s or renter's insurance
• Furniture, furnishings, appliances
• Utilities (including heat, lights, water, sewer, telephone, water softener, cable, waste disposal, etc.)
• Rent paid
• Repairs paid personally
• Loan refinancing costs
• Other (everything except food and household employee compensation)

(Sources: IRS Publication 1828; Clergy Housing Allowance Clarification Act of 2002; IRS Regulation §1.107-1)

Any financial assistance that a minister’s employer can give is appreciated. A car allowance can be especially helpful. Car allowances, however, must be established as “accountable plans.” This means that any advances given by the employer to the minister must be properly substantiated on a timely basis or the law requires the minister to refund the unspent, undocumented portion of the allowance.

It’s a better idea to offer a professional expense allowance under accountable plan rules of the IRS (instead of a car allowance) that covers car expenses and any other professional expense. Documentation can then include non-auto costs such as air travel, lodging, conferences, gifts, entertainment, books, supplies, and any other legitimate ministry-related expenditure. The minister documents car expenses when he provides a record of the date, business purpose, and number of miles for each trip. The total miles submitted for reimbursement should then be multiplied by a per mile rate adopted by the church. The IRS sets maximum per mile rates each year that may be used if the church wishes without requiring inclusion of the reimbursement payments on the minister’s annual Form W-2.

Even though the IRC permits the payment of advances, church funds will be managed more effectively if the church budget establishes an expense category with an annual limit and if the church only disburses funds as documentation is received.

Tax-saving opportunity: For 2015, the IRS increased the allowable mileage reimbursement/deductibility rate to 57.5 cents per mile.

Tax-saving opportunity: Ministers who incur unreimbursed employee business expenses may include these costs as miscellaneous itemized deductions on Schedule A. Unfortunately, these deductions often do not reduce ministers’ taxable income because of required modifications for two percent of Adjusted Gross Income and for the prorated tax-free portion of their income (i.e., the housing allowance) (source: Publication 517). However, many ministers fail to also reduce their self-employment taxable income on Schedule SE by these same amounts.

Many ministers and their employers are looking for alternative plans to control rising health care costs without neglecting those in need of medical services. Because of the new Affordable Care Act (ACA) requirements, the majority of churches need to re-think the medical benefits it offers to employees. If the church employs a single employee—a solo minister, the ACA has one set of requirements. (From our opinion, there is more flexibility when there is only a solo employee.) But for churches that employ two or more employees who participate in medical benefits, the ACA has stringent requirements. We suggest that you consult your own tax professional when offering medical benefits. The benefits the church offers may very well be 100 percent taxable to the employee.

Be aware that if a church covers the monthly share costs of an employee for a health-sharing plan (e.g., Samaritan Ministries International, Medi-Share, or Christian Healthcare Ministries), the amount paid by the church is subject to income tax for all employees and to FICA for all standard employees. The church needs to remember that health-sharing plans are not the same as health insurance plans.

The answer to this question varies greatly based on the church’s and minister’s specific situation. However, following are several issues that most likely will need to be addressed.

1. Any property transferred by the church to the minister will be considered taxable compensation at its fair market value (reduced by any payment by the minister to the church).
2. Because the minister will no longer be living in real estate that is tax-exempt housing, his costs of living will increase accordingly.
3. The tax-free nature of a housing allowance may not fully eliminate the taxability of any one-time, large bonuses to the minister, even if entirely disbursed to construct or purchase a home. This is due the requirement that a housing allowance not exceed the annual fair rental value of a minister’s housing.
4. Interest-free (or below market rate) loans from the employer to the minister or principal forgiveness arrangements in reward for ongoing longevity can aid in the transition from a church’s “parsonage era” to homeownership for its minister. Care must be taken, however, to comply with IRS income reporting rules and to establish a written agreement that reflects the true substance of a legally binding arrangement between the church and its minister.

Tax-saving opportunity: December and January “bonuses” to assist the minister in constructing or purchasing a home, if implemented properly, can spread the income and self-employment tax costs over two different tax years. Principal forgiveness arrangements established as legitimate compensation for ongoing longevity can spread these tax costs over several consecutive years.

The bookkeeping system used by a church must be compatible with current and future treasurers’ training and experience. To adopt a system that is overly complex or suitable for only a highly qualified bookkeeper may create grave difficulty when there is turnover in the treasurer’s position. Following are several solutions that small local churches have found useful:

1. Paper cash receipts and cash disbursement journals—the treasurer uses two separate columnar journals with columns for the amount of each bank deposit (in the cash receipts journal) or for the amount of each check (in the cash disbursements journal). Additional columns of the journals are used to record the amount of the bank deposit or the check into categories consistent with the accounts presented in the church budget. Each month the columns of both journals must be totaled and the totals compared with the check register that, itself has been reconciled with the monthly statement from the bank. The beginning checkbook balance, plus the total bank deposits per the cash receipts journal, less the total checks per the cash disbursements journal, must equal the ending checkbook balance. Periodic reports may be prepared based on summarizing the month-end totals of the journals.
2. Electronic cash receipts and cash disbursement journals—the treasurer follows the same procedures described above using spreadsheet software.
3. Accounting software—the treasurer uses QuickBooks, Peachtree, or other low-cost software. While generally around $250 per year (not including a payroll add-on) will be incurred to maintain software, either previous formal training in bookkeeping or considerable on-the-job training will be required.