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28 Sep 2017

Avoiding Illegal Use of the Church Credit Card

Raul Rivera

There is some debate as to whether or not pastors should have a discretionary fund. The problem with this particular debate is not the topic itself, but rather, the problem is that most church leaders involved in the debate are basing their opinions on misinformation.

But what if I told you the proper implementation of a pastoral discretionary fund could help ministers avoid illegal use of the church credit card?

To help provide insight surrounding pastoral discretionary funds, I want to share with you a story that will show you the benefits of pastoral discretionary funds when properly implemented and used. 

If you are not sure what a pastoral discretionary fund is, keep reading because I will explain that, too!

Prepared to be a blessing to others

It was a cold, rainy day when Pastor Miller noticed a man walking around the neighborhood, pushing a shopping cart containing all of his earthly belongings. Pastor Miller pulled into the nearest parking lot, stepped out of his car, and offered to buy the man a meal. 

Receiving the generous offer, the man walked with Pastor Miller into a sandwich shop. Pastor Miller proceeded to buy the man a meal, plus another to take back to the place he called home.

After a short exchange of words with the man, Pastor Miller headed back to his car and drove to a local gas station. There, he filled up his gas tank with the church credit card and went to evening service.

Illegal use of the church credit card?

All year long, Pastor Miller used the church credit card for transactions like the one described above. He even used it to purchase his wife a new dress for their anniversary.

Now, you are probably thinking the pastor’s use of the church credit card is illegal. Yet, what if I told you how he was using the church credit card was perfectly fine? Would you believe me? 

For Pastor Miller, using the church credit card is legal because during each annual board meeting, Pastor Miller’s board of directors created a pastoral discretionary fund; furthermore, the board established a split pastoral discretionary fund

A split pastoral discretionary fund allows Pastor Miller the ability to use his discretion on how the funds will be used. Pastor Miller has also used these funds to help the poor, assist a missionary, buy school supplies for a needy family, and donate to a local pro-life group.

How to establish a pastoral discretionary fund

Income Tax Regulation 1.451-2(a) allows for churches to establish a discretionary fund for pastors. However, it is necessary to follow the established guidelines for creating this split fund to avoid paying unnecessary taxes or receiving penalties from the IRS. (See section 4958 of IRC.) 

It is important to note that if any designated funds in the pastor’s discretionary fund are personally available to him, then the entire fund is taxable to him.

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With a split fund, however, a portion of the funds are restricted to be used only for ministry purposes, while the unrestricted portion can be used without regard to the ministry’s tax-exempt purpose.

Below is sample language to include in your pastoral discretionary fund policy:

Pastor’s Discretionary Fund Policy

This church shall designate a special fund, which shall be called "The Pastor's Discretionary Fund" for the purpose of relieving certain administrative burdens. It shall be funded up to a total of $7,500.00 for tax year 2017. The fund is subject to the following funding limitations described below.

1. $5,000.00: These funds are restricted to be used solely for purposes that are consistent with our exempt purposes, including helping the poor and ministering to the needs of the congregation. At no time shall the minister make distributions to himself/herself. The board of directors shall maintain administrative oversight of this fund. The pastor shall submit receipts to the board for expenses so that they may be entered in the church's accounting system.

2. $2,500.00: These funds are not restricted, and the pastor may use these as he/she sees fit and may make distributions to himself/herself. The board of directors shall maintain administrative oversight of this fund. 

The church shall include the $2,500.00 mentioned above in line 1 of the pastor's W-2 form.

Notice that the fund has a restricted portion of $5,000.00 and an unrestricted portion of $2,500.00. The only portion taxable to the pastor is the unrestricted portion.

Pastoral discretionary funds can relieve administrative burdens

This fund resolves the administrative burden of formally documenting benevolence expenses before any funds can be distributed. 

Oftentimes, pastors encounter immediate needs they would like to meet. By pre-approving a designated amount in the pastor's discretionary fund, the pastor can address such needs, like Pastor Miller did, and not worry about the formalities of documenting expenses.

Moreover, the pastor can also use the church credit card for some personal expenses, like filling up the gas tank, without having to fill out any paperwork for a reimbursement.

Do you want to learn more strategies to grow and protect your church?

Churches and ministries face many challenging laws today that threaten their ability to maintain existence, much less grow.

At StartCHURCH, we are committed to providing services that help pastors to ensure their churches remain compliant with today’s laws. We do this by teaching pastors and church leaders the importance of working ON their ministries and not just IN the ministry.

Come and spend a day at one of our conferences and learn how to protect and empower the dreams and vision that God has given you. 

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Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Raul Rivera

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About the Author

Church Planter. Speaker. Author. CEO. Raul Rivera has had ample experience in the church planting world. His current venture, StartCHURCH, has helped 1000's of churches to start right. Raul has compiled an array of manuals and software tools that help churches stay compliant with the IRS. He also hosts over 35 national conferences per year, training pastors on how to launch their churches. Raul is married to his wife Genel, and they and their five children live in Atlanta, GA.