Clergy Question

[Dave T]

T/P is a retired school district employee and also holds credentials as a minister.

His denomination requires that a percentage of his tithe be submiited to the denomination ( not just his local church ) in order to retain his credentials. This tithe is not just on his ministerial income but from all sources of income.

In 2012 he only had a few local speaking engagements so income form this was nominal but his tithe to the denomination was greater than this amount. I believe that this tithe is an ordinary and necessary expense and would be shown on his Sch. C but it just seems odd to me that this should generate a loss.

Any thoughts?

Thank you

- Dave T

[Lion EA]

I don't know, so I'm asking. Why isn't a tithe a Sch A deduction?

[grandmabee]

I think it goes on A as contribution

[Dave T]

Yes - normally the tithe would be a Sch. A deduction but in this situation as it is a requirement for his credentials so I think it is a business expense to offset Sch. C income.

The other portion of his tithe to his local church is a Sch. A deduciton.

[kcjenkins]

Dave is correct. If it is a requirement in his denomination, [the case in several Pentecostal denominations, I know] then it is a business deduction. I've won that one in several audits.

[SFA]

Schedule A deduction. Merely because the church "requires" him to tithe, doesn't overide the character of his contributions.

[JohnH]

Schedule C deduction. It fits the definition of "ordinary and necessary", and that's the threshhold he has to meet. It's not different than property tax paid on a business vehicle - the portion attibutable to business expense goes on schedule C and the rest on schedule A. He will have to prove the tithing requirement if he's ever audite, but it appears he's covered. If I were preparing the return, I might ask him for a copy of the written requirement for my files.

[SFA]

OR: Form 2016: employee business expense? Does he receive a W-2? The Sch C expenses are to offset only the Sch C income items--not his W-2 compensation. I'm still thinking 100% Sch A charitable contributions.

[Margaret CPA in OH]

In my handy dandy Church and Clergy Tax Guide 2013, the lengthy discussion re Forbes v. Commissioner, T.C. Op. 1002-167 (unpublished) states that it would be a deductible business expense for SECA purposes to the extent of "the income she receives as a result of her position as a minister. Because it is a small TC decision it cannot be cited as precedent, however.

I IRS 2009 audit guidelines, it's a little murkier with acknowledgement of 'small annual renewal fees' being allowed and rejecting the Forbes decision. There is more but Pixley v. Commissioner there is also the issue of secular earnings. Overall the suggestion is that 'ministers who treat contributions to their employing church as a business expense are taking an aggressive postion that is now more likely to be scrutinized and challenged.'

FWIW

[grandmabee]

what about profit motive? if any I would only take the tithes on the portion coming form his schedule C income not his other income that he tithes

[chadlonetree]

70% of my business is ministers. This is very common in certain denominations. I have been through dozens of audits where this issue came up. While many call them tithes, they are essentially district dues or credential fees (depending on the organization and where they are paid). If you have the district or general bylaws of the organization that states it is required, you will not lose an audit by claiming this as SCH C expense.

Be careful of Clergy tax guides. There are so many different denominations and structures, it can be as different as preparing a return for a farmer and a pastor when you are looking at two ministers from radically different denomination structures. Many of the guides are written as a "catch all" that generalizes structures like Methodist, Southern Baptist, Lutheran. Some structures are radically different and need to be examined.

[Margaret CPA in OH]

Thanks, chadlonetree, for additional information. The guide to which I referred is nondenominational and a publication of Christianity Today by Richard R. Hammar, J.D., LL.M, CPA. I provided the court cases to stir additional research by the OP and in no way intended it to be a definitive answer. The passages I took were a small portion of about 3 full pages. I agree that the OP must check with the specific denomination and determine what, exactly, the 'tithes' constitute.

[Lynn EA USTCP in Louisiana]

Chadlonetree, I too have been using Richard Hammer's Clergy Tax Guide. MMy clergy are Jewish; is there a tax guide specific to Jewish Clergy? thanks, Lynn

[MAMalody]

I agree with Dave T, kcjenkins and Chadlonetree that these are professional expenses. Unlike chadlonetree, I work exclusively with clergy. Now, don't get the wrong idea, I don't know all there is to know about clergy taxes....but I have, also, dealt with this issue for a number of years. Lynnjacobs, sorry, however, I do not know of a tax guide devoted exclusively to Jewish clergy taxes.

[Lynn EA USTCP in Louisiana]

is there another guide you'd recommend besides Richard Hammar's? I always enjoy threads about specialty tax areas. LOTS to learn!

Thanks

[SFA]

I am just about finished with a clergy return. Small church with a minister who's compensation is all "housing allowance" no W-2 issued. He has some Sch C income, and lots of mileage. He is a new client this year, so I asked him what his clergy credentials were? Apparently, in his faith, the requirements are that you must believe in God and declare your intent to minister! His congregation accepts that and pays him a housing allowance. I googled his church and they have an EIN and are recognized as a church and publish their services locally. OK, so how much investigation do I need to do regarding his credentials? And how about him not receiving anything from the church to document his housing allowance? Argh.

[jainen]

>>how much investigation do I need to do regarding his credentials?<<

A little less than you already did.

[MAMalody]

In reference to tax books, I do like Hammer as an all-around book. I also try to augment that by denominational specific books. I have found that Hammer and Busby seem to write the ones I have come across.

There are some questions I ask every pastor: (1) Are you commissioned, licensed or ordained? (2) Do you have an approved Form 4361? (3) Does your church have an IRS approved written accountable reimbursement policy? (4) Do you have a housing allowance? and (5) Was it designated before it was paid to you? There are obviously more questions to ask, however, since I am called to use due diligence and not audit the return (except for EIC) I generally take the pastor's word for the answers. If they are not clear on the answers, then I pursue that are more vigorously.

In reference to documentation for the housing allowance, it is not required to be reported on any current IRS form, therefore, you simply need to use some discretion. I have asked for documentation from the church based on the dollar amount and whether this is a returning client, etc. I have never had a probelm getting any information that I needed. I have found that the pastors I have dealt with only want to have their return done correctly and to receive the tax benefits they are entitled to.

[SFA]

Thank you for this information. To know your client is always a good starting point. Exactly, we are not private investigators. Tax returns are like snow flakes--each one generally has something unique. In the case of this minister, you are also right, he has been sweet and truly just wants me to prepare his return like a professional. I did quite a bit of research, and was surprised to find that his church does not need to issue any documentation to the IRS regarding the housing allowance payments since he is not receiving W-2 compensation for services.

Some of the points made in this thread have really helped me prepare for this return. Thank you.

[J. Ron]

Richard Hammar's book is the most authoritative for all around church issues. He also does some denomination specific writings that are usually distributed by the denomination or one of its entities, I know that Guidestone Financial Services, an arm of the SBC, has a book that can be downloaded. I have also seen work done for Methodists and Presbyterians that are more specific for each denomination. Another book that I have found valuable is B.J. Worth's INCOME TAX GUIDE FOR MINISTERS. When I am trying to educate ministers I use it most often simply because it is more concise, specific, and understandable for ministers.

[jainen]

>>obviously more questions to ask<<

Generally, but especially when the entire compensation is designated as housing allowance, I would clarify that it does not exceed actual costs. I don't think that applies here anyway, because in SFA's post it doesn't sound like the minister is ordained. If that is correct, the housing allowance can not be excluded from income and needs to go on Schedule C.