Parsonage and Housing Allowances Face Increasing Scrutiny
A new threat recently arose to the longstanding tax law providing special treatment of housing allowances for pastors.
Judge Barbara Crabb of the Western Federal District Court of Wisconsin agreed with the Freedom From Religion Foundation’s (FFRF) challenge to the constitutionality of the housing allowance. (Note that this decision doesn’t have any impact on the parsonage allowance.)
Enforcement of this court’s action is stayed pending appeal. Based on previous federal court rulings, the ruling will likely be reversed on the fact that FFRF held no legal standing to sue because they weren’t harmed.
The housing allowance refers to compensation designated as a reimbursement of housing expenses paid by the pastor – whether the home is owned or rented – while the parsonage allowance refers to compensation paid in-kind when providing housing in a church-owned parsonage.
While motivation for this provision attack is partly because well-known pastors pressed the limits in their use of this exclusion, we’re all well aware abuses occur, intentional or not, by pastors at all levels of income strata.
Key staff of all local churches and related para-church organizations need to know the proper way to execute housing or parsonage allowance resolutions annually, how to properly report compensation of pastoral staff on W-2’s and how pastors should report their income and business expenses on their personal tax returns.
To be excluded from taxable income, the housing/parsonage allowance must be designated and approved in advance of payments to qualified clergy. IRS regulations specify the designation of the allowance may be contained in “an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action.” Expense reimbursement policies and employee benefit plans are governed by specific rules as well.
We need to keep our house in order if we want to defend this benefit from continuing attacks from those seeking to weaken the historical protection of rights of churches and their members.
If you need help with accounting for housing allowances or advice on not running afoul of the IRS, Online Stewardship is here for you. Contact us at Lynn@OnlineStewardship.com or 904-398-4747.
