Unreimbursed Business Expenses

Clergy can have a portion of their paycheck set aside as unreimbursed business expenses; taxes would not have to be paid on this amount. To qualify as an unreimbursed business expense, the expense must meet two criteria: the item must relate to the clergy’s occupation, and the expense must not be paid by the parish. For example, a priest pays for a subscription to a magazine that will help him perform his duties better. Since this is a legitimate business expense, and the priest is paying this expense out of his pocket without reimbursement from the parish, he can claim this as an unreimbursed business expense. If the parish reimbursed the pastor for this expense as part of the continuing education benefit, the pastor could not claim it because the parish ultimately paid for the item. Items that can be claimed as unreimbursed business expenses include professional fees, books, periodicals and subscriptions, memberships and dues, continuing education, supplies, mileage, and postage.

Mileage is one area that confuses a lot of people. Assume the IRS mileage rate is 32¢ a mile. If a priest traveled 1000 miles in one month during the course of his work, and did not receive a mileage reimbursement from the parish, he could claim $320.00 as an unreimbursed business expense. If he received a mileage reimbursement from the parish (in our example, at 30¢ a mile), he could claim the difference between the two rates, 2¢ a mile, as an unreimbursed business expense of $20.00 for that month.

There are two methods that can be used to handle unreimbursed business expenses. The first method has the pastor submitting these expenses to the parish, and the parish paying the bills, indicating in their records that these items are unreimbursed business expenses. When the time comes to pay the pastor, the amount of unreimbursed business expenses is totaled, and that amount is subtracted from the pastor’s salary as a pretax deduction. The parish would then write a check to the priest for the remaining salary. If a priest makes $2000 a month and the parish has paid $500 of unreimbursed business expenses, the priest’s taxable income would be $1500 and he would receive a check for that amount.

The other option has the pastor paying the expenses himself. At the end of the month he submits a Preists’ Business Expense Form (found on page 147a-1 of the Diocesan Policy Book) to the parish listing his unreimbursed business expenses for the month along with receipts verifying the expenses. The pastor will then receive two payroll checks: one tax-free check for his unreimbursed business expenses, and another check for his taxable income. In our above example, the priest would a check for $500 and another check for $1500, less taxes.

An important thing to remember about unreimbursed business expenses is that they are pretax payroll deductions and are part of the pastor’s salary. No matter which method is used, the unreimbursed business expenses must be coded as salary when paid. In the example above, the total priest’s salary for the month is $2000, regardless of how much of it is unreimbursed business expenses. The expenses come into play when looking at tax issues. In the situation above, the priest would have a gross salary of $2000 but a taxable salary of $1500. The taxable salary is the amount that will be reported on his W-2 form and is used to calculate his taxes for the year.

For more information on this topic, refer to item II(b) on page 147 of the Diocesan Policy Book.