Transparency In Ministry

In our series of ordinary and necessary expenses, churches and ministries should document lodging and certain incidental expenses (such as cab fares) by receipt and/or other contemporaneous records that include the business purpose of the trip.

If proper documentation is not received by the church/ministry for expenses paid by the church/ministry on the behalf of an individual, the IRS would deem those expenses paid by the ministry as income to the person that incurred the expense. If the ministry does not identify those expenditures without proper documentation and either demands repayment or classifies them as compensation to the individual, the transaction becomes an “excess benefit transaction” and would be subject to an excise tax of from 25% to 200% payable by the individual.

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting marketing or recommending to another party any transaction or matter addressed herein.

For more information about excess benefit transactions, please contact us.

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.