Unsubstantiated business expenses and lost receipts can be a big headache for everyone involved in the financial process of the church.
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.
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.)
You can see from this case that on order for expenses to be considered legitimate accountable reimbursements the expense must be:
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:
Business mileage reimbursements should substantiate:
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.
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.
Richard Hammar's Church and Clergy Tax Guide
Please comment by using the form below. It’s easy! No registration required!
Just enter your title of your tip, idea, comment, or question in the text box below.
(*Tip: Write your comment in a simple word processor first, make all your corrections, then copy and paste into the box below. Please do NOT type in ALL CAPS; but I would appreciate if you did capitalize "I" :)
Please keep it as short as possible and still convey what your comment is about and make people want to click on it.
Then click on the link below it that says: Click here to see the rest of the form and complete your submission.
Please be aware when you submit your post that I am the only moderator and sometimes it takes me a little bit to get your submission approved and posted on this site...
but if you will click on the Notification Options you will get an email when I get it up. Please be assured that I will use your e-mail address only to notify you as you requested.
Also...please be aware that with my “regular” job, building and maintaining three web sites, and my volunteer work at my church, I cannot possibly answer and comment on every submission.
However, your opinions, questions, and comments are very valuable to me...so I will try to answer questions when I can, but I am relying on the goodness of others to help here:)
The following comments, tips, and Q/A were provided by FreeChurchAccounting's wonderful readers:
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 …