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.
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 following comments, tips, and Q/A were provided by FreeChurchAccounting's generous readers:
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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.