Disclaimer: This is general tax advice so don’t sue me. Most people I know struggle with math…not just pastors. To make matters worse, try doing math when you know that the IRS will be grading it. The meme below illustrates the problem.
So I understand folks wanting to avoid any changes that will affect their taxes. If you mess up, there are real consequences. But I’ve seen churches and pastors go overboard in trying to avoid taxes. They will turn down a good benefit just because it is taxable. Here’s the two I’ve seen most often:
- Moving Reimbursements: Pastors turning down reimbursements for moving expenses to avoid the tax. In most cases, the tax on the reimbursement will be around 25% which means you keep the other 75%…which is a lot more than 0% for rejecting it.
- Renting to a For-Profit Business: Renting the parking lot or some building space may result in Unrelated-Business Income Tax (UBIT)…especially if you have debt on the property. If you rent your parking lot out for $1,000/month, you’d pay around 37% UBIT. You do the math, that would give you around $7,500 for the year. If you make them responsible for snow removal on weekdays, you’d pretty much double your money.
My 2¢ is to go ahead and try the math. For pastors, multiply the value of the benefit by 25% to see what the tax cost is. If it’s a cash benefit, I’d take it pretty much every time. If it’s a non-cash benefit, would you normally pay out-of-pocket for that benefit if you received the equivalent of a 75% discount. For churches, the biggest thing would be factoring in the cost of the tax when you set the price.
Useful Links
- Pre-tax Church Student Loan Program: http://jctaccounting.com/2020/07/31/cares-act-church-paying-pastors-student-loans/
- Pre-tax Health Reimbursements (QSEHRA): http://jctaccounting.com/2020/08/14/how-to-reimburse-employee-health-costslegally/
- Clergy Tax Estimator: https://www.dakotasumc.org/media/files/CONFERENCE/5_Conf_Finance_Benefits/Finance/Clergy_Tax_Estimator.xlsx
- UBIT Explanation: https://future.aicpa.org/resources/article/unrelated-business-income-taxes-ubit-in-a-nutshell
- Cool Math Games: https://www.coolmathgames.com/