Best Practices for Managing Church Expense Reimbursements

Expense reimbursement accounts are essential for supporting a church’s mission and ministry, offering flexibility and convenience. However, improper administration can lead to a world of issues. The best approach for handling clergy and non-clergy staff expense reimbursements may be through an “accountable” reimbursement plan. This article outlines what these plans are and how to use them effectively.

What is an “Accountable” Reimbursement Plan?

An “accountable” reimbursement plan requires employees, including pastors, to submit supporting documentation for business expenses to receive approval for reimbursement. Some churches provide credit cards for business expenses, but documentation is still required to substantiate the charges.

Requirements of an “Accountable” Reimbursement Plan

It’s important to know the guidelines for managing these plans. An “accountable” reimbursement plan must meet the following criteria:

Business Expenses Only: Only ministry-related expenses are reimbursed.
Adequate Substantiation: Expenses must be substantiated within 60 days of incurring them.
Expense Report Details: The report must include the:
- dollar amount
- description/purpose
- place/vendor
- date, and
- names of individuals involved, meaning who is being reimbursed and if the expense is a meal, who accompanied the person being reimbursed.
Excess Reimbursement: Any excess reimbursement must be returned within 120 days.
Church Funds: Reimbursement must come from church funds, not by reducing the employee’s salary.
Unused Funds: Unused funds at the end of the year cannot be given to staff members; otherwise, all reimbursements become taxable. The church would then need to include all reimbursements for the year as W-2 taxable income.

Typically Allowed Expenses

Eligible expenses must be business-related, necessary, and reasonable. Common reimbursable expenses include:

Travel, including rental cars (excluding a spouse’s travel unless required by the church for business)
Lodging
Meals
Business telephone calls
Mileage for personal car use
Tolls and parking
Professional dues and training
Conference and convention fees
Computers (owned by the church but may be sold or gifted at fair market value to the staff member)
Office supplies
Books, subscriptions, and other reasonable and necessary business expenses

Approval and Taxation

A church officer should approve reimbursements, ensuring all expenses meet policy requirements and are properly documented. Under an “accountable” plan, reimbursements are not reported as compensation on the employee’s W-2 and are not taxed as income.

Do Advance Monthly Stipends Count?

Advance monthly stipends to cover estimated costs do not qualify with the IRS as “accountable” reimbursement plans. Without proper documentation, stipends must be reported as taxable income and reported on a W-2 form.

Setting It All Up

Establishing an “accountable” reimbursement plan is easy. The church doesn’t need to file any forms with the IRS or obtain their permission. Here are the steps in this process:

Documenting the Policy: Create a written policy defining eligible expenses and procedures and authorization for advance payments for specific purposes. Note that if advance payment exceeds the actual amount of the charges substantiated, the employee must return the excess within a reasonable time.
Submitting Expense Reports: Staff must provide documentation to substantiate expenses.
Appointing a Manager: Designate a church officer to manage the plan.
Filing and Retaining Records: Organize and retain submitted reports and supporting documents.

Tax Deductions for Unreimbursed Expenses

Due to the Tax Cuts and Jobs Act (TCJA) of 2017, employees can no longer claim deductions for unreimbursed business expenses. Therefore, it is crucial to ensure business expenses are reimbursed tax-efficiently under an “accountable” plan.