Can the IRS Tax Pastor Appreciation Gifts?
By Raul Rivera
“Well done pastor!”
The driving force behind what pastors and ministry leaders do is a higher calling from the Lord to help those who are hurting and in need of hearing the good news of the gospel. One of the most beautiful things in the month of October is how churches and ministries take time to celebrate pastor appreciation.
Many churches and ministries use this time to celebrate and encourage those who God has called to lead. A church congregation will often express its appreciation by giving the pastor a gift, such as an iPad, a vacation getaway, or in some instances a car.
Are these gifts of appreciation taxable to the pastor? How can this be done legally?
In order to understand the answers to these questions, we need to understand how the IRS defines income. Then we will be able to examine how you can show appreciation to your pastor without potential tax implications.
What does the IRS say about gifts and taxable income?
Internal Revenue Code (IRC) section 61 says that all income from whatever source derived is subject to taxes, unless the tax code makes an exception. The law does make a provision under IRC section 102(a) stating that gifts do not have to be reported to the IRS.
This is good news . . . right?
Well, although the tax code makes an exception that gifts do not have to be reported to the IRS, the tax code also makes an exception to this exception.
IRC section 102(c) specifies that a gift given by the employer (church) cannot be considered a gift since it was given in consideration of services rendered.
So does this mean that anything you give to your pastor for pastor appreciation will be taxable to him/her?
However, in order for the gift to remain nontaxable you need to understand the IRS’s rules on gifts given by your church.
Rules on gifts given by your church
The moment your church decides to give your pastor a gift of appreciation, you must determine if the gift is taxable or if the gift falls under an exception.
Below is an explanation of the rules that govern gifts.
Rule #1: All gifts of cash, gift certificates, or gift cards are always taxable.
Treasury Regulation 1.132-6(c) makes it clear that cash, or cash equivalents, are subject to federal income tax as well as social security tax. Examples of gifts which are considered cash, or cash equivalents, include the following:
- Actual cash or check (no matter how small in amount);
- A gift card (no matter how small in amount); and
- Redeemable gift certificates of any kind.
Rule #2: Some tangible gifts must be reported as taxable fringe benefits.
Tangible gifts are things you can touch, such as an iPad or vehicle. Fringe benefits are any material benefits provided by an employer (your church) to an employee (your pastor) that is not included in his/her stated compensation agreement.
While the depth of information surrounding vehicles provided by a church to a pastor is outside the scope of this blog, I do want to touch briefly on this topic since so many churches and pastors have questions surrounding this benefit.
In short, here is what you need to know about church-provided vehicles to pastors:
- Church-provided vehicles with no personal use: If a church provides its pastor with a church-owned vehicle with no personal use of the vehicle, but permits commuting to and from the church office, then the use of the vehicle will not be taxable to the pastor. There are, however, certain conditions that apply.
- Church-provided vehicles with personal use: The general rule is that personal use of a church-provided vehicle is taxable income for a pastor and it must be valued and reported using one of the four valuation rules: (1) general valuation rules, (2) lease valuation rules, (3) cents-per-mile rules, or (4) commuting valuation rules.
Please be clear that I am not saying your church cannot or should not bless your pastor with a vehicle. Rather, if your church is able to do so, there are guidelines that should be considered by both the church and pastor before such a benefit is given and received. Also, you may need to consider restructuring the pastor’s salary agreement or contract.
Learn More About Minister Compensation AgreementsClick Here
Rule #3: Some tangible gifts do not have to be reported as taxable fringe benefits.
Perhaps the most common nontaxable fringe benefit is known as a “de minimis” fringe benefit. In essence, the term de minimis means minimal.
So, if the pastoral appreciation gift you give to your pastor is so minimal in value that it would be unreasonable or administratively impractical to account for, your pastor will not have to include the value of the gift as taxable income.
Such gifts may include the following:
- Handwritten letters from members of the congregation expressing their gratitude.
- A gift basket containing some of the favorite things your pastor enjoys, such as candy, coffee, favorite pens, etc.
- A video presentation of the past year of the church. This could also include recorded thank-yous from the congregation to the pastor.
These gifts may not be as extravagant as a paid vacation or a car, but they are heartfelt and will be just as meaningful to your pastor.
Give your pastor the gift of dreaming
There is another type of nontaxable fringe benefit of which you may have heard: a working condition fringe benefit. However, for a benefit to be considered a working condition fringe benefit that is excluded from taxes, the benefit must relate to the pastor’s job.
For instance, if the pastor passes through toll roads while commuting for church purposes or if your church is located in a city, such as New York City, where the pastor has to pay for parking, these are instances of working fringe benefits that the church can pay for and not be taxable to the pastor.
Additionally, did you know that registration fees for church leadership and pastoral conferences paid by the church for the pastor are considered a working condition fringe benefit?
There are many great conferences available for pastors to attend. However, not every conference will provide pastors with the opportunity to dream bigger for their church while being supplemented with practical strategies to see those dreams come to fruition.
I encourage you to register and pay for your pastor to attend the Ultimate Church Strategy Conference as a token of appreciation for him/her. For more information on what this conference is about, click on the link below or give us a call at 877-494-4655 and speak with one of our knowledgable staff members.
Learn More About the Ultimate Church Structure ConferenceClick Here
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