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Clergy may no longer receive arbitrary, tax-free allowances for auto, library, convention and similar professional expenses. However, these expenses may still be received free of all federal, state, and city income taxes, and Social Security taxes by completing a two-step process.

First, the church must establish a written accountable reimbursement plan for business expenses.

Second, the church board should establish an annual maximum amount that can be reimbursed, which could be specific to a job title or some other method if desired. They may even specify caps on various types of business expenses within the overall maximum. This step should be done annually with appropriate dollar amount adjustments, and should be in writing and approved by the board.

To assist the board in determining the structure and dollar limits for reimbursement, the church could ask the ministerial staff to fill out a categorized list of their estimated business expenses for the upcoming year.

Churches should be careful to keep this arrangement as an "employee benefit" separate from compensation. The IRS is currently not friendly toward plans that allow employees to set the amount of reimbursement out of their compensation dollars, and may consider them to be non-accountable (see IRS Letting Rulings 9325023 and 200035012). This current position has been "under consideration" by the IRS since June 2000, with no new rulings being issued. It is important to seek professional tax counsel on this topic on an ongoing basis.

Ministerial staff should then submit business expense receipts and automobile mileage logs to the church treasurer monthly for reimbursement. The church treasurer is responsible for documenting all tax-free reimbursements provided to clergy in the event of a church audit.

See our Audit Proofing Your Church & Its Clergy guide, Part III, for:

• Business expense list and worksheet for estimating clergy business expenses
• Professionally-prepared Church Board resolution to establish a church accountable reimbursement program
• Explanation of two possible methods of reimbursement for automobile expenses, the largest business expense for most clergy.

• order the "Audit Proofing Your Church and Its Clergy"  Tax Guide
   

• schedule a conference call with a Financial Stewardship tax advisor and my church staff and/or church board
   

• inquire about a free review of my last two years' personal Income Tax returns
   

• inquire about a speaker for our next Pastors' Fellowship meeting