A deacon who receives a tax free housing allowance is required to reduce business expense deductions in proportion to tax-free income to total income. For example, a deacon with a $20,000 salary has a tax-free housing allowance of $12,000. His ratio of tax-free income to total income is 60% (12,000/20,000). The deacon can only deduct 40% of unreimbursed business expenses.
It is strongly recommended that the clergyman consult a tax accountant when setting up a tax-free housing allowance.