In light of the current spotlight on televangelists let's review appropriate expenses and required documentation/substantiation.
For an expense to be an appropriate expense for a ministry, the expense must be ordinary and necessary, which in general requires a showing that the expense was incurred principally for and has a reasonably close relationship to the tax-exempt purpose of the church or ministry.
Additionally, proper documentation must be made for the expenditure. For meals, the following should be recorded:
> the amount and a description of each separate expenditure;
> the time and place the meal was provided;
> the business purpose of the activity, including a description of any business benefit derived or expected, and the nature of any business discussion with the person entertained; and
> the business relationship to the person or persons entertained, which may be indicated by reference to name, title, occupation, or other designation sufficient to establish the relationship.
The above documentation should be contemporaneous.
See post #2 for substantiation requirements for lodging and incidental expenses.
Comments (2)
Lisa this is a great question and one that could require a thesis on "how" to substantiate ministry/pastoral expenses. We personally like to refer to the concept of church expenditures and the substantiation and documentation of such expenditures as falling into one of three buckets; 1) ministry purpose 2) additional compensation or 3) fraudulent.
The accountable reimbursement plan requires EVERYONE to substantiate expenditures. Contemporanious substantiation requires documentation that supports the ministry purpose/relationship for the disbursement. Any unsubstantiated expenditures that does not support the ministry purpose, unfortunately could fall into the 2nd or 3rd bucket. Many churches fail to see the danger in not documenting such expenditures and don’t realize the risk they run of loosing their exempt status and the potential for intermediate sanctions.
The following is an excerpt from the IRS tax guide for Churches and Religious Organizations:
Accountable Reimbursement Plan is an arrangement that an employer establishes to reimburse or advance employee business expenses will be an accountable plan if it meets three requirements: (1) involves a business connection;
(2) requires the employee to substantiate expenses incurred; and
(3)requires the employee to return any excess amounts. Employees must provide the organization with sufficient information to identify the specific business nature of each expense and to substantiate each element of an expenditure. It is not sufficient for an employee to aggregate expenses into broad categories such as travel or to report expenses through the use of non-descriptive terms such as miscellaneous business expenses. Both the substantiation and the return of excess amounts must occur within a reasonable period of time.
Employee business expenses reimbursed under an accountable plan are:
(a) excluded from an employee’s gross income;
(b) not required to be reported on the employee’s IRS Form W-2, Wage and Tax Statement; and
(c) exempt from the withholding and payment of wages subject to FICA taxes and income tax withholdings.
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Posted by Floyd/Becky | April 18, 2008 6:08 AM
Posted on April 18, 2008 06:08
Dear Becky:
I am serving on the church Finance Team. We are having a difficult time trying to find IRS definitions of allowable Pastoral expenses. The Pastors claim that they are treated uniquely by the government, barring them from "mainstream" business expense rules. We are on the accountable reimbursement plan. Can you point me in the right direction as to where I can locate such guidelines?
Thanking you in advance,
Lisa
Posted by Lisa | April 1, 2008 3:58 PM
Posted on April 1, 2008 15:58