A recent ruling by the IRS has the potential to significantly penalize pastors and churches who fail to report non-accountable reimbursements as income.

The ruling published in August, 2004, classifies this type of transaction as being an “automatic excess benefit transaction” and therefore subject to intermediate penalties of 25% excise tax to the pastor, a possible 200% penalty if the money
is not returned in a timely fashion and a 10% penalty on any organization manager
(officer, director or trustee).

This ruling applies to all churches regardless of size or salary level. This means that if a pastor is receiving a monthly allowance for mileage that is not part of an accountable plan, that money must be reported as income on the W-2 to avoid these penalties. Because it has to be reported as income, the pastor will pay income taxes on this money less what s/he may be able to deduct on Schedule B of his/her tax return. This amount will only be that which is over 2 percent of adjusted gross income if the minister is able to itemize deductions. Still, the best way to handle the pastor’s expenses is to set up a qualifying accountable plan.

A “qualified accountable plan” requires that the pastor submit to the board or an appropriate officer of the board (treasurer) written documentation noting the date, amount, business purpose, location and place of expenses within 30 days of the expense before receiving reimbursement. Reimbursements paid by this type of plan are not taxable and do not need to be reported as income on the W-2. This, of course, means more of the money actually stays in the minister’s household to be used for living expenses.

For more information on how to set up an accountable plan or to structure other aspects of your pastor’s compensation so that it is as effective as possible, contact your Area Minister, Region staff or your MMBB representative.