Monday, August 5, 2013

Quickest way to lose your housing allowance...

...other than resigning, getting defrocked, or sacked from your church: fail to properly set it up.

GuideStone, clergy tax specialists, and state convention financial staffers all give the right counsel to churches and clergy about the housing allowance to assist them in following the rules of the Internal Revenue Service.

GuideStone says, in part:

Churches should designate a housing allowance in writing before the beginning of a calendar year. Although the IRS has recognized oral designations, they are difficult to prove. The “governing board” of the church should designate the allowance

 Churches can designate a housing allowance only prospectively, not retroactively. In other words, the church must designate the housing allowance before the minister earns the income on which the church designates the housing allowance.

 A minister cannot exclude income as a housing allowance unless the church designated it before the minister earned income for ministerial services. In other words, it has to be designated in advance (prospectively), not retroactively.  
Ah, but no church or pastor has to listen to anything GuideStone, clergy tax specialists, or anyone else has to say. The brethren are often irrationally recalcitrant when it comes to listening and taking advice. Some of my colleagues decided long ago that they had the sum total of all knowledge necessary for the pastoral ministry.

Alas, the IRS doesn't recognize clergy omniscience.

Consider the case of pastor Ricky Williams whose housing allowance was flatly disallowed by the IRS, a decision upheld by the tax court. My CPA blogging buddy Peter J. Reilly, who has a keen eye for clergy tax issues, especially when they concern the housing allowance, gives the details:
Pastor Loses Parsonage Exclusion to Poor Planning

Granted in the case of Brother Williams, he did attract the IRS' attention by reporting income of $103,733 along with about $82,076 in expenses, including the $33,126 housing allowance. He was audited and found not to have properly taken the housing allowance. He owes the IRS a ton of money.

Peter Reilly concludes with the some advice:
Church governing bodies need to set housing allowances up front.  I’m sure that having learned this lesson the hard way Reverend Williams and St. John Missionary Baptist Church won’t be making the same mistake again. 
Our Sacred Clergy Tax Break, the Housing Allowance, is revered by all Southern Baptist clergy that I know. If we are to keep it individually we have to follow the rules, or lose it. Thankfully, most of my clergy colleagues understand dollars and cents and nothing gets their attention quicker than the possibility of losing some.

Details and particulars aside, the Housing Allowance is being challenged in our courts. Nothing new here but stay tuned.


RLBaty said...

Speaking of the FFRF IRC 107 Challenge, both sides have filed motions within the last few weeks asking the Judge to render a summary judgment for their respective positions.

The Government gets a final response which is due by the end of this week.

After that, hopefully, the Court will quickly rule on the summary judgment motions.

If both sides are denied, then the case will proceed towards the January 2014 trail date.

Bennett Willis said...

How did he manage to have $102K income and $80+ expenses even with the $30K housing. This still leaves $50K in expenses that he claimed. What did he do to run up that sort of expenses?

Peter Reilly said...

There is a link to the decision in the forbes post which will give you more detail.

William said...

Sometimes following a link is too much heavy lifting. Aside from the housing allowance, the minister took about $30k for buisness use of his home and some other lesser expenses.

My non-CPA mind is speculating, not double tax deduction but TRIPLE: taxable income reduced by the same expense being used three different ways? (1) housing allowance, (2) business use of home (3) mortgage interest deduction?

Pretty sweet if it is possible. Small wonder some non-clergy resent our tax break.

Bert Ross said...

Great Post, Many churches and pastors do not think they have to follow government regulations and guidelines.

Another area they need to be aware is in employment law issues. As a human resource professional I have talked with many church leaders that are in violation of employment law guidelines. Ignorance of the law does not hold when they are audited by the DOL and EEOC.