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Are There Limits on Pastoral Lunch Expenses?

By Trey Lewis

When was the last time you treated a guest speaker or another pastor to lunch? What about lunch with another staff member? Did you purchase the lunch on a church credit card? Or, did you purchase the lunch and then later receive a reimbursement from the church?

These lunches are common for many pastors, and how you handle such expenses and understand when they are deductible matters. Take for instance Pastor Philips. 

It is customary for Pastor Philips to take guest speakers out to lunch or dinner after a church service. For him, it is simply a part of being hospitable. Pastor Philips always pays for the meal out of his own pocket, and then submits the receipt to the church secretary requesting a reimbursement.

Before making this a common practice, Pastor Philips dedicated some time to learning and understanding how to properly handle entertainment and lunch expenses the right way so as to be held “above reproach.”

I will use this post to share with you what Pastor Philips learned so that you too may handle such expenses in a compliant manner. 

Understanding when entertainment expenses are deductible

What comes to mind when you think of entertainment expenses? According to IRS Publication 463, “Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation.” 

A couple of examples of how ministers incur entertainment expenses include taking guest speakers and denominational leaders out to eat a meal or meeting with church members at a restaurant for counseling purposes.

How can you know when entertainment expenses are deductible to you as a minister?

In short, entertainment expenses are deductible if they meet one of the following tests:

  • Directly-related test, or
  • Associated test.

Next, we will review what it takes to meet the requirements of both tests.

Directly-related test

To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that:

  • The main purpose of the entertainment was the active conduct of business; 
  • You engaged in business with the person during the entertainment period; and
  • You had more than a general expectation of getting income or some other specific business benefit at some future time. 

The IRS states that entertainment expenses are not considered directly related where there are “substantial distractions” that generally prevent you from actively conducting business. How do you measure what is considered substantial? 

Thankfully, the IRS provides guidance in IRS Publication 463 by giving the following examples of situations where there are substantial distractions:

  • A meeting or discussion at a theater or sporting event.
  • A meeting or discussion during a social gathering, such as a party.
  • A meeting with individuals who are not business associates such as in restaurants, country clubs, athletic clubs, or vacation resorts.

Associated test

If your entertainment expenses do not meet the directly-related test, they may meet the associated test. To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is:

  • Associated with the active conduct of your ministry, and 
  • The entertainment occurred directly before or after a substantial business discussion. 

Therefore, if you take a guest speaker out to lunch or dinner, then the meal has to occur directly before or immediately after a substantial business activity, such as his/her speaking engagement, in order for the meal to be considered an entertainment expense. (See IRS Publication 463)

What about the pastor’s spouse?

Oftentimes, when a pastor takes a guest speaker out to lunch or dinner after a church service, the pastor’s spouse will come along if the guest speaker’s spouse is also going. This usually leads to pastors asking if the meals of both spouses can also be included as an entertainment expense. 

To help answer this, we will look to an example in IRS Publication 463:

"You entertain a customer. The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. The customer's spouse joins you because it is impractical to entertain the customer without the spouse. You can deduct the cost of entertaining the customer's spouse. If your spouse joins the party because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible."

Based upon this example, we can say that the cost of a meal between you, your spouse, a guest speaker, and his/her spouse may be deductible as an entertainment expense.

Is there a limit to an entertainment expense deduction?

If your church is able to reimburse you for the entertainment expense that you incurred, then it must be done under an accountable reimbursement arrangement plan.

In Publication 463, the IRS defines a reimbursement or other expense allowance arrangement as “a system or plan that an employer uses to pay, substantiate, and recover the expenses, advances, reimbursements, and amounts charged to the employer for employee business expenses.”

Churches and ministries that go through our StartRIGHT® Program receive an accountable reimbursement policy to adopt.

What if your church or ministry does not have an accountable reimbursement plan, or what if your church or ministry is unable to reimburse you?

In this instance, you may deduct ministry-related entertainment expenses on your personal income taxes, but you may deduct only 50% of those expenses. So, if you incur ministry-related entertainment expenses totaling $300.00 for any one year and your church or ministry was unable to reimburse you, then you will only be able to deduct $150.00 on your personal income tax return. 

You may deduct your unreimbursed ministry-related entertainment expenses only as a miscellaneous itemized deduction on Schedule A of Form 1040. However, you must be able to itemize deductions in order to claim them, so make sure to keep all receipts. 

Here is the kicker - you may only deduct miscellaneous business expenses if such expenses exceed 2 percent of your annual gross income. Such restrictive rules have resulted in ministers and church employees not being able to deduct unreimbursed business expenses.

(Recommended reading: “What Your Church Needs to Know About Reimbursements, Part 1”) 

The adoption and implementation of an accountable reimbursement plan can help reduce the effect of such restrictions, which is why we teach about reimbursements at our conferences. If you have questions about how to do this, give us a call at 877-494-4655

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What about lunch expenses with other staff members?

We have covered a lot of information, but before concluding this post, I want to mention the deductibility of lunch expenses with other church staff members. It is not uncommon for ministers and other church staff members to go out to lunch. For many church staffs, this may be a weekly occurrence. 

The general thought is that since church matters are typically discussed, then the lunch can either be paid for by the church using a church credit card or reimbursed under an accountable reimbursement plan.

Yet, is that really so?

To best answer this question, we look to see how the issue has been addressed. Based upon previous tax court rulings what seems to matter is the frequency and purpose of such lunches. The tax court never specifically defined what is considered “frequent.”

In the case of Wells v. Commissioner, Docket No. 6088-76, 1977 Tax Ct. Memo LEXIS 22 (U.S. T.C. Dec. 7, 1977), the meals of attorneys who met together for lunch one day each month were considered too frequent to be business-related expenses. 

While lunches with church members and other non-staff individuals will most likely qualify as an entertainment expense, lunches with other staff members will not. However, staff lunches that are “occasional” and used to discuss the operations or future of the church (church business) may be regarded as a necessary and ordinary expense of the church. 

Committing to an attitude of excellence

Reimbursements for entertainment expenses have often been abused, which has caused the IRS to closely monitor such deductions. This is one of the reasons why we should commit to operate and act in a spirit of excellence like Pastor Philips. It will not always be easy, but I guarantee it will always be worth it.

My question to you is: “In what area of ministry and compliance could you use some help?” Pastor Philips recognized an area where he needed help and he took it upon himself to find the answers that he needed. However, there are times when the answers may not always be easy to find, or we simply do not have time to search for the answers. 

Let us help - that is why we are here!

We understand that being a pastor or ministry leader requires more time, effort, and energy than it has ever before, and you simply do not have the time to do everything yourself. I encourage you to reach out and give us a call at 877-494-4655 and let us know what you need.

Also, we would love for you to join us at one of our upcoming Ultimate Church Structure Conferences and spend some time with us committing to an attitude of excellence.

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