Fill Your Car With Gas, Break The Law - Part 1

Reimbursements can save your organization from a tough spot by allowing staff the freedom to make needed purchases for ministry operations when a church debit/credit card or check is not available. But reimbursements can also get you into a world of trouble if you do not handle them properly.

When done right, the ability to receive reimbursements can be very convenient to an organization. With a well-established reimbursement policy, your staff knows when expenses are reimbursable and when they are not. This plan also keeps the board from making costly mistakes that can jeopardize a nonprofit’s tax-exempt status.

The accountable reimbursement plan

The IRS defines reimbursements 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.”

Simply put, reimbursements are a way for staff members to recover personal expenses made on behalf of their employer’s business.

The key here is that any employee expense that is reimbursed must be substantiated, i.e. there must be proof that the expense was a necessary business expense. Documenting the “when, where, and why” of an expense holds the employee or staff member accountable for the reimbursement he or she is requesting. This documentation is the proof that the employee’s funds were truly used for a business expense necessary to keep your organization going. The fact that the employee’s expense on behalf of the business was “accounted for “makes the reimbursement nontaxable.

What can be reimbursed?

Your organization can reimburse legitimate business expenses needed in order to operate your corporation. There must be a business related reason for the expense to be reimbursed.

Even with this understanding, determining where to draw the line with reimbursements can be fuzzy. Sometimes your ministry may not have funds to reimburse every expense. If you have an established budget, this makes managing reimbursements much easier. Those with access to spending accounts should know the types of purchases they are authorized to make. Clearly communicating to the staff that only expenses made according to the church's budget will be reimbursed helps ensure that everyone is on the same page.

What cannot be reimbursed?

Business expenses that are claimed as a personal deduction on a tax return cannot be reimbursed by an employer. For instance, if a pastor pays the rent for his new church and properly claims it as an unreimbursed business expense on his tax return, that pastor is not able to also receive a reimbursement from his church. He has already used a tax deduction to recover the expense of the rent he paid on his ministry’s behalf. 

Additionally, remember that every reimbursed expense must be substantiated. Usually, substantiation is proved using receipts; however, the receipts should be accompanied by a log detailing where all monies were spent in order for the expenditure to be considered accountable. If an expense is made, but no receipt is retained and no log is kept, then there is no way to validate the expense and therefore, it cannot be considered accountable.

Additionally, reimbursements must be requested within 60 days of incurring the expense according to IRS Publication 463. After this time frame, the organization is not permitted to offer a reimbursement.

When reimbursed funds are not returned

If an employee receives too much of a reimbursement, or if he or she receives an advanced reimbursement and does not use the entire amount, the unused funds must be returned to the church/ministry. Any unreturned funds must be counted as taxable income for the person who received them because there is no substantiation to prove that the funds were used for church purposes.

Any advanced reimbursement that is not used must also be returned in a timely manner. The IRS states in the above mentioned Publication 463 that you have 120 days to return the funds. After that time frame the reimbursement must be considered taxable income and listed on the employee’s W-2, or on the 1099 for an independent contractor.

What are non-accountable reimbursements?

Many churches and ministries are guilty of allowing non-accountable reimbursements. Here is one example. A church gives the pastor a gas allowance of $200.00 per month.  The church board does it to cover the pastor’s gas as he uses his personal car to do church ministry. Every month, the church issues him a check for $200.00 and writes “gas allowance” on the memo, assuming that he is being reimbursed for his gas. While that may be true, the IRS considers this a non-accountable reimbursement because there is no official record of the actual miles for which he is being reimbursed. Under current regulation, non-accountable reimbursements must be treated as gross income and must be reported on the recipient’s tax return as wages.

There is more!

When it comes to understanding reimbursements, there is more than just understanding what is accountable and what is non-accountable. Although it is important to understand the differences between the two, it is also good to know the various methods for managing reimbursements and how to apply them to your ministry. That additional information is addressed in part 2 of this blog.

If you are interested in learning more about effectively managing your organization’s finances, consider attending one of our conferences or registering for our online certification program. We have a wealth of resources available to help you and your ministry succeed!


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