Accountable reimbursement plans are a valuable resource for most churches and nonprofits. Most experts recommend even the smallest churches set up an expense reimbursement policy for their pastor and staff to use.
An accountable reimbursement plan is an employee reimbursement arrangement or method for reimbursing employees for legitimate business expenses.
If set up correctly, reimbursed business expenses do not have to be treated as taxable income.
See this page for instructions on setting up and administering an accountable reimbursement plan.
However, an expense reimbursement policy could turn into a nightmare for a church and their minister and/or staff if not done properly.
If a minister or church is audited and there is not proper supporting documents backing up the reimbursement claims, the reimbursements could be considered income for the minister or staff member. They would then owe penalties for not claiming the income…and it snowballs from there.
There are 3 requirements for an effective and "legal" accountable reimbursement plan.
The last 2 components must be handled within a "reasonable time".
According to IRS Pub 463, the definition of "reasonable time" "depends on the facts and circumstances of your situation. However, regardless of the facts and circumstances of your situation, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time".
The following methods meet the "reasonable time" requirements:
The fixed date method applies if:
The periodic statement method applies if:
Make sure they know what an appropriate business expense is and what is not and the time limit for obtaining the supporting documents.
The IRS requires the employer to keep good accounting records. Every reimbursed expense must include the following information (the 4Ws):
Last but still very important...include wording in your accountable reimbursement arrangement that would allow your minister/staff to claim unreimbursed expenses on their personal taxes IF the church could not afford to reimburse those expenses.
I read an article on StartChurch many years ago on this very issue. Even though this article was written back in 2012...it still applies to accountable reimbursement policies today. (The link to that article is located at the bottom of this page.)
The article stated that in a recent court case, Stidham, T.C. Summ. Op. 2012-61, the court ruled that a taxpayer is not entitled to take a tax deduction for unreimbursed businesses expenses if the employer has a reimbursement policy.
This ruling may impact small churches that are not always able to afford all reimbursements. The author pointed out that churches may need to amend their accountable reimbursement policies to include wording that would require the church to send a written reply to the requesting employee recognizing their claim as legitimate but also denying it according to its reimbursement policy on the basis that it cannot afford to issue the reimbursement.
I have been asked this frequently enough that I am adding it on to this article...just so I can point my clients to it =)
Can we reimburse our Pastor for meals?
When I am asked this question...my answer is always..."It depends." Here is what I ask to figure out whether they can lawfully reimburse or pay for pastoral meals. (This goes for my non-profit administrators too.)
Was it a "business" meal? If not, then no...you cannot reimburse or pay for their "personal" meals.
If yes...do you have an approved accountable reimbursement plan in place? If you don't have one...get one set up as soon as possible because you can't legally reimburse those "business meals" tax free without a proper AR policy in place.
If you do have an AR policy, was the meal or entertainment directly related to church/ministry/nonprofit organization business? Startchurch posted a great article on that subject: Are There Limits on Pastoral Lunch Expenses?
They include some great guidelines on when it is proper to include the spouse in that meal/entertainment reimbursement too.
If it was for business purposes...make sure and DOCUMENT whom were they with and the purpose of the meeting. I tell my clients to flip over that meal receipt and quickly jot down those details, so they will be able to remember them when they turn those receipts in and fill out a expense reimbursement form.
And finally...there are different situations where "meals" can be reimbursed or paid for with your church or organization's check or debit/credit cards. Make sure you outline them in your AR policy. For example, paying for meals while traveling is different than the Pastor taking a guest speaker out to lunch. They need to be recorded separately in your accounting and have different guidelines in your AR policy.
Most policies state that the organization will pay for meals when traveling over 75 miles from home. However, I had one potential client get upset with me when I told him ...even with a proper AR policy in place...the church could not legally pay for that daily donut and coffee stop and lunch stop for himself and if I was doing his bookkeeping ...those meal expenses would have to go into Box 1 of his W-2. His reasoning was that he was about town doing church business and the church should pay for his meals. I explained that even though I am out all day visiting clients...my business cannot reimburse me for the meals I eat out ...unless I am meeting a client for lunch AND there is a business purpose involved OR I was at a conference over 75 miles from home. He didn't hire me =)
Follow the guidelines in this article and research IRS publications and topics that relate to employee expenses such as IRS Topic 514 and write detailed accountable reimbursement guidelines to include with your Accountable Reimbursement Plan, so everyone will know what you can legally and properly reimburse/pay and what you cannot.
Dan Busby's Church and Nonprofit Guide
Richard Hammar's Church and Clergy Tax Guide
Raul Rivera's Auditing Reimbursements; An Easy Win For the IRS
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The comments above are for general information purposes only and do not constitute legal or other professional advice on any subject matter. See full disclaimer.