Unsubstantiated Business Expenses 

Unsubstantiated business expenses and lost receipts can be a big headache for everyone involved in the financial process of the church.

Unsubstantiated business expenses

Accountable Reimbursement Policies are an acceptable way for churches to reimburse its staff for church-related business expenses.  

They can be extremely tax beneficial and I recommend every church set one up no matter how small you are.

However, there should be some strict policies set up as well to ensure all reimbursed business expenses are properly substantiated.

Without this documentation you run the risk of those reimbursed staff members being charged with tax evasion (if unsubstantiated business expenses not reported on their income) and losing credibility with your church members as a whole.

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Dangers of unsubstantiated business expenses:

A well-known court case that substantiates the need for proper receipts and documentation and the dangers of unsubstantiated business expenses is in the United States v. Jinwright, Nos 10-5289, -5290 case.

Even though that case involved unreported love offerings and other issues, it also involved unsubstantiated business expenses payments which the court concluded should have been included in their reported taxable income.

"The trial judge - a total of four times - instructed the jury among other things that employer payments to an employee as reimbursements for business-related expenses "must be included in the gross income of the employee" unless certain conditions are met - namely, the expenses are "ordinary and necessary business expenses"; the "business nature of the expenses has been substantiated"; and "any unsubstantiated payments have been returned to the employer." (excerpt from Employer-Employee Reimbursements - 4th Circuit Approves Burden-Shifting Instruction in Criminal Tax Case article.)

Avoiding unsubstantiated business expenses:

You can see from this case that on order for expenses to be considered legitimate accountable reimbursements the expense must be:

  • Required to carry on church business and be “ordinary and necessary”. This simply means they should be common for your type of business. For example: a video game would be considered an ordinary expense for a business owner that reviews video games...but not so much for a minister:) 
  • Substantiated (receipts and supporting documents)
  • Required to return any excess payment over actual cost of expense within a reasonable amount of time.

Entertainment expense is often an area where there is not enough information recorded to “substantiate” the business expense.

Expense reports for those types of expenses should establish:

  • the amount,
  • date and time,
  • name and address or location of place of entertainment,
  • business purpose for the expense or the business benefit gained or expected to be gained, (For entertainment, the nature of the business discussion or activity. If the entertainment was directly before or after the business discussion: the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity.)
  • and the business relationship of the parties involved. (such as names, titles, or other designations)

Business mileage reimbursements should substantiate:

  • The amount of the expense
  • The time and place of the travel
  • The business purpose

Note: Commuting miles (distance from the recipient’s residence to the church or nonprofit organization) is not an allowable tax-free business expense. If you reimburse for commuting miles, you will need to include and report the total amount on the recipient's W-2.  

Lost receipts can also be a problem. Your policy should state how much time the reimbursed recipient has to provide a receipt AND the consequences of NOT providing that receipt in the time allotted. 

See tips on keeping track of receipts!

Remember: Unsubstantiated business expenses reimbursements can possibly create taxable income to the recipient of the payment.

Lost receipts can also be an issue for staff or volunteers picking up items for the church.  Have them take pictures of the receipt with their phones as soon as the purchase is complete and then send to the appropriate person. At least that way you have a backup if a receipt gets “misplaced”.

These are just a few of the measures you can put in place to make sure all expenses are properly documented and substantiated and the church is being proper stewards over God’s financial blessings.

Return to Setting up a Proper Accountable Reimbursement Policy

Reference:

Richard Hammar's Church and Clergy Tax Guide

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Unsubstantiated Business Expenses Reader Comments

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

Entertainment  
Our church is mobile and currently without a central office. Our pastor has to do his counseling and meetings at local coffee houses and sandwich shops. …

Youth Pastor Retreats-do you record as income? 
We have a Youth Pastor who goes on retreats and the church pays (no one has voted to do so) for he/wife to attend. Do we (the Stewardship Committee) need …

Meals & Entertainment 
I am working with a couple different people with churches who use the church bank credit card to pay for meals and entertainment, instead of using an accountable …

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