Pastor: Car Allowances Are Not Necessarily Tax Free - Joshua M. Cantwell, CPA, MBA, CFM, CMA  -

Many of our church clients designate a portion of the pastor’s compensation package as a “car allowance” but mistakenly treat all or a portion of the allowance as tax free income; incorrectly reasoning that a car allowance is entitled to the same tax treatment as the clergy housing allowance. As discussed below, a car allowance that exceeds the amount reimbursable by law, or that is left unsubstantiated, will be treated as taxable income to the pastor. In a separate legal update, we will address the new statutory limitations on the clergy housing allowance, which may increase the pastor’s taxable income.

CAR ALLOWANCES OR MILEAGE MAY BE TAXED AS INCOME– SUBSTANTIATION REQUIRED

A church may reimburse its employees, contractors or volunteers for operating a vehicle for business purposes by either: (1) reimbursing an individual’s actual expenses incurred in operating a vehicle (proven by receipts), or (2) reimbursing an individual at the standard mileage rate published annually by the IRS (proven by a mileage log), plus business related tolls and parking (proven by receipts).

For the year 2004, the IRS approved standard mileage rate for employees and contractors is 37.5 cents per mile and volunteers is 14 cents per mile. The amount of reimbursement is computed by multiplying the applicable mileage rate by the number of business miles driven. Revenue Ruling 87-93.

If a pastor receives more than the standard mileage rate or actual expense incurred, irrespective of what the reimbursement is called, any excess sum paid to the pastor is treated as regular income to the pastor. On the other hand, if the pastor receives less than the standard mileage rate or actual expense incurred, the difference may be treated as a deduction on the pastor’s tax return.

Important Note: A church may elect to pay a pastor or its staff a car allowance in excess of actual expenses or mileage. The question is simply whether the payment will be a reimbursable expense (non-taxable) or whether all or a portion will be treated as taxable income. If a church elects to reimburse the standard mileage rate, but does not obtain from the individual a mileage log, or some equivalent thereof, documenting the date, place, number of miles driven, and business purpose of each trip, then regardless of what the church calls the monies paid to the pastor, the amount would be taxable just like any regular salary. Such payments would be subject to Federal and State income taxes, self-employment taxes (if the employee is a minister and has not properly opted out of social security), and the employer and employee share of FICA taxes (if the employee is non-clergy).

QUALIFYING MILEAGE – WHAT COUNTS AS NON-TAXABLE?

Business related transportation expenses, including local transportation expenses, are a reimbursable expense; meaning it can be tax-free if reimbursed under an accountable reimbursement plan. A full discussion of the makings of an accountable reimbursement plan can be found in the PTC syllabus, which can be purchased online.

The question then is what mileage qualifies as “business related”?

Commuter or personal travel expenses incurred for travel between the individual’s home and ‘regular’ work location (and vice-versa) are not considered to be tax-free, reimbursable expenses¹. If paid or reimbursed, the payment represents taxable compensation to the individual. Thus, expenses incurred for commuting to and from home and work are taxable income to the employee if paid by the church.

However, the IRS treats temporary work locations differently than regular work locations. Commuting from home to a temporary work location in the same trade or business may be a reimbursable expense. For example, church staff may perform some of their services at hospitals for sick visits, or at members’ homes for counseling or ministry, or at jails, or juvenile hall, or shelters, or rest homes, or parks, etc. Each of these locations may qualify (if not a ‘regular’ work location) as business mileage even if the staff member travels directly from his/her home to the temporary location.

Generally, if the employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary. Otherwise, the location will not be considered temporary, and any mileage reimbursed would be treated as income. It is important to note that mileage accumulated going from the church facility (as opposed to mileage from home) to any other location, as long as it serves a business purpose, would be reimbursable (e.g. tax free) regardless of whether the work location is temporary or regular.

Again, the church may elect to pay its staff for all types of travel expenses, including commuter expenses, but the IRS may consider such payments taxable compensation. This holds true whether the church titles the payment “car allowance” or some other tax-free-sounding name.

Examples of Non-Reimbursable Business Trips Starting at Home:

Trips from home to the church (or other regular work location) for regular or even special services, or trips from home to the church to pick up needed equipment, and the like, are not reimbursable expenses.

Examples of Reimbursable Business Trips Starting at Home:

Trips from home to a church member’s home or the hospital, or to a business meeting away from the church, or to a meeting with a public official, or to a funeral service, or a church approved continuing education event, and the like, are reimbursable business expenses.

PRACTICAL CONSIDERATIONS

See IRS Publication 463 - Travel, Entertainment, Gift, and Car Expenses for additional information.

Should you have any questions, please don’t hesitate to call the Sozo Consulting hotline at 650.906.7272 or send an email. We are here to serve and protect you.


¹ Employees qualifying for the home office deduction can deduct the mileage from the home office to the church facility and vice-versa.

*CA State Income Tax withholding is also required. But for purposes of this article, only Federal withholdings will be addressed directly. In most cases, CA withholding rules are very similar to those detailed within this article.   Protect the Church is sponsored by Christian attorneys and CPA's to provide periodic updates of the laws and legal and accounting issues of general interest to religious organizations. This article is not to be construed as specific legal advice or as a substitute for legal counsel regarding your case. Any ideas or opinions expressed herein should not be implemented without consulting an attorney or CPA familiar with your situation. To learn more about legal and accounting resources for ministries log onto our website at www.protectthechurch.org. If you have a specific legal issue or problem, you may contact Sharonrose Cannistraci, Esq. at 408.297.5400 ext. 206 or via e-mail.  If you have a tax or financial question, you may contact Joshua at his consulting firm Sozo Consulting at  650.906.7272.

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