A minister has been using tax preparation software foryears. He is paid as a Form 1099-MISC, self-employed pastor. The program sent himto a worksheet which took his Schedule C business expenses and reduced them bya percentage of income attributed to housing allowance. He had never had thathappen before. Is there some new regulation or provision in the tax code?
What the minister is dealing with here issomething called the Deason Rule, and it is based on a tax case going back to1964. The rule applies to clergy who are able to take business expense deductionsfor unreimbursed business expenses. According to the IRS: “A minister maydeduct ordinary and necessary business expenses. However, if a minister'scompensation includes a parsonage or housing allowance which is exempt fromincome under IRC § 107, the prorated portion of the expenses allocable to thetax exempt income is not deductible, per IRC § 265, Deason v. Commissioner, 41 T.C. 465 (1964), Dalan v. Commissioner,T.C. Memo. 1988-106, and McFarlandv. Commissioner , T.C. Memo. 1992-440.”
Thereis a way that will help the pastor get out of the Deason Rule, and it is byhaving the church set up an Accountable Plan for his professionalclergy expenses. Under such an arrangement, the church establishes part ofits minister’s compensation package for ministry expenses. The minister isreimbursed for those expenses. By doing this, the pastor will not haveunreimbursed expenses that will be of limited tax benefit. Hint: This would bea good time to use this blog’s search window to find and review Accountable Plans.
The members of my Federal Taxation I class at MaranathaBaptist Bible College in Watertown, Wisconsin have taken on the challenge ofstudy and research to answer posted questions. Mariya Bondarenko of Minnesota getscredit for this one.
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