To loosely paraphrase a familiar scripture from Jeremiah … “Vacation is past, the summer has ended, and we are not safe!”
Many times a pastor will find it convenient to combine a ministry conference with a family vacation –especially when the conference is located near a popular tourist site. Nothing wrong with this great use of calendar time, and even an economical saving as travel expenses are reduced to one trip. The problem arises, however, when the church is paying for the travel expenses with no reimbursement from the pastor for the personal benefit …or the “fringe benefit” is not reported as taxable income.
This has become a “hot button” for the IRS, and can potentially result in additional tax liabilities PLUS penalties to the pastor for unreported income …and penalties to the church for failure to report income.
This past year (2013), the IRS audited a church in Virginia –initiated due to erroneously filed Forms 941 –which resulted in a far-reaching review of all of the church’s accounting records. One of the 44 items in the IRS Document Request Form 4564 stated as follows:
“…it appears as though the organization paid expenses for Pastor’s spouse to travel with him. Why did the organization pay for her travel expenses? Who approves her travel? Why were these expenses not reported on Pastor’s Form W-2 as compensation? Please detail what expenses were paid for Pastor’s spouse and include a description of each. Also, are any expenses paid for Pastor’s children? If so, please provide the same details as was requested for Pastor’s spouse.”
Under Section 262 of the Internal Revenue Code, no portion of the travel expenses that is attributable to personal, living, or family expenses is deductible. Additionally, Treasury Reg. Sec. 1.31-21(a)(4) states that a benefit provided on behalf of an employee is taxable to the employee even if the benefit is received by someone other than the employee, such as a spouse or a child.
What to do if this applies to you? … a church and/or pastor? If the church has paid for pastor’s personal expenses, you have two options: (1) pastor can reimburse the portion allocated as personal, or (2) church can include the amount on pastor’s Form W-2. Both options call for good (accurate and adequate) supporting documentation.