Do This Now For 2016
By Raul Rivera
As surprising as it seems, the end of 2015 is quickly approaching! It seems like it was just a few short weeks ago that we were ringing in 2015 and looking forward to the new year. Now, with only two months left before 2016, it is an opportune time to reflect on God’s blessings and provisions over the last year and to begin planning for 2016.
Perhaps the greatest tax benefit afforded to ministers is the housing allowance. Unfortunately, many ministers fail to take full advantage of this provision because they, and/or their churches, are not familiar with the rules that define and govern this valuable provision within the Tax Code. In order for you, as an ordained minister, to take full advantage of this benefit, it is necessary before the end of 2015 for you and your church to designate your housing allowance for 2016.
I am going to explain to you in this post why it is necessary to go ahead and designate your housing allowance for next year. In addition, I am going to explain how to properly designate and establish your housing allowance.
Understanding housing “allowance”
If you have been in the ministry for any time at all, then you know that a minister of the gospel can designate some or all of the salary received from the church as a housing allowance. Although the housing allowance provision has been around for nearly 100 years, it is still largely misunderstood today by both churches and pastors. The misunderstanding, I believe, stems largely from the inherent imagery that the words “HOUSING ALLOWANCE” create in the minds of church leaders.
By this, I mean that when most ministers hear the words “housing allowance”, they immediately think of a portion of money that is given to them to cover their housing needs. Ministers with this misconception usually do not view themselves as “on salary” when they receive the housing allowance.
Perhaps a better term to describe this benefit afforded to ministers is “HOUSING EXCLUSION”. This is because the salary that a minister receives (from the church) that is designated as a housing allowance may then be excluded from gross income and is thus, tax-free income.
We will look at what is meant by “excluded” a little later, but first, let us look at why it is necessary for you to go ahead and designate the housing allowance before the end of the year.
Why designate now?
Many churches fail to designate a housing allowance for their minister(s) by the end of the year. Oftentimes, churches do not recognize the need to do so until it has been a few weeks, or perhaps months, into the new year.
This does not prevent the minister from receiving a housing allowance for that year, but what is often not realized by churches and ministers alike is that, according to IRS regulation, a church can only designate a housing allowance for that minister for the remainder of the year.
IRS Publication 1828 states, “The minister’s church or other qualified organization must designate the housing allowance by official action taken in advance of the payment.” In other words, the housing allowance only operates prospectively, not retroactively. Therefore, when a church proactively designates a portion of the minister’s salary as housing allowance prior to a new year beginning, then the minister is able to fully capitalize on this extraordinary tax provision.
Designating the housing allowance
Section 107 of the Tax Code provides that a minister of the gospel may exclude from his gross income for federal income tax reporting purposes:
- the rental value of a church owned home (parsonage); or
- the portion of the minister’s salary that has been designated as a housing allowance, to the extent that it is used by the minister to pay for home related expenses (furnishings and utilities included).
From this we can gather that the housing allowance exists in two manners; for ministers who live in a parsonage and for ministers who rent or own a home.
Ministers who live in a parsonage
For ministers who live in a parsonage, the amount excludable from income tax may not exceed the fair market rental value of the parsonage. Many churches often fail to understand that when the church provides a parsonage, it must be documented in advance as a parsonage provided as compensation for the minister’s services to the church.
Furthermore, Treasury Regulation 1.107-1 also indicates that out-of-pocket expenses for furnishings and utilities that the minister pays for the parsonage may be included in the amount designated as a parsonage allowance.
Ministers who rent/own a home
The vast majority of ministers today either rent or own their home. Fortunately, section 107(2) deals directly with ministers that receive from the church a housing allowance as part of their compensation.
Like a parsonage, the housing allowance must be designated in advance by the church. It must be done by resolution of the board of directors and properly recorded in the board meeting minutes of a legitimately called board meeting.
Yet a common question that many churches and ministers ask in this situation is, “How much can the church designate?” Let us take a look at that next.
How much can the church designate?
There is nothing in the Tax Code, treasury regulations, or other IRS publications that limits the amount or percentage that a church can designate as a housing allowance for its minister(s). The designation does not determine how much the minister will be able to exclude from gross income. It simply meets the legal requirement that a housing allowance be designated in advance of payment for services the minister renders to the church.
A church can designate 100% of compensation as housing allowance. The IRS Ministers Audit Techniques Guide limits the amount of the housing allowance excludible from gross income to the least of:
- The amount actually used to provide a home,
- The amount officially designated as a housing allowance, or
- The fair rental value (FRV) of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.
In addition to knowing how much the church can designate as a housing allowance for the minister, it is imperative that you properly document everything. You must make sure that every year you have adequate records to show the values of each of the above items.
Steps to proper documentation
The housing allowance is established through a board meeting in which the board passes a resolution to provide a parsonage or adopt a housing allowance plan for the minister. If your church has more than one minister, it will have to create an individual housing allowance plan for each minister. The resolution has to have the following key pieces of information:
- A board meeting must be properly called;
- The minute taker must document the date of the board meeting;
- The chair person must declare that a quorum is present;
- Wording must state that the parsonage or housing allowance is provided as compensation;
- It must be carefully worded so that it is set to be perpetual unless it is revoked by the board;
- The minister’s name must be clearly documented as the one receiving the parsonage or housing allowance;
- In the case of a housing allowance, the board must require a housing allowance expense worksheet from the minister every January.
Conclusion
The housing allowance is a tax provision that I believe each and every minister should take advantage of fully. Unfortunately, as we have seen, there is a lot of misunderstanding in regards to the housing allowance benefit from both churches and ministers. It does not have to be that way.
After reading this, if you find that you are not 100% sure you have been doing your housing allowance correctly, I want to encourage you to give our office a call, toll free, at 877-494-4655. One of our knowledgable staff members will be happy to address your concerns and tell you more about our housing allowance service.
Lastly, I invite you to attend one of our Ultimate Church Structure Conferences. We only have four more conferences remaining this year, but we have released our conference schedule for the first part of next year and we would love to have you join us!