Pastor Runs Into Tax Trouble for Taking Guest Speaker to Lunch
It was his custom to take guest speakers to lunch or dinner after a church service. He felt it was part of being hospitable. In fact, he held on to Galatians 6:10, which commands us to "do good to all people, especially to those who belong to the household of faith." And so, as was his custom, he always took guest speakers out to a meal, paid for it out of his pocket, and then turned in the receipts while requesting a reimbursement from the church. Everyone would agree that such a practice is not only common, but also good. However, when his tax return was audited, the agent had a problem...not with the practice, but with the way in which it was done. I caution you to pause for a moment and ponder this: The practice was OK but the method was wrong, and it cost him dearly. You may be doing the same thing and it is important that your church adopt the proper procedures in such practice.
How the pastor did it
Guest speaker John Doe spoke at Pastor X's church, and after the service, Pastor X and his wife invited guest speaker John Doe and Mrs. Doe to lunch, which cost a total of $97.00. Afterward, Pastor X turned in the receipt to get reimbursed for the cost of the lunch. The church treasurer wrote him a check for $97.00. It seems difficult to believe that this got him into trouble, but it did, for good reasons.
1. The church did not have an accountable reimbursement policy that meets the requirements of section 62 of the IRS code.
2. His wife was not an employee of the church. She was not allowed to be included in the entertainment expense and the cost of her meal be reimbursed because they could not document that it served a legitimate business purpose.
How he should have done it
This type of transaction is called an "entertainment expense," and such expenses have very strict substantiation requirements in order for them to be legal. Below are the five requirements.
1. The church has to have an accountable reimbursement policy that meets the requirements of section 62 (If you have been to one of our conferences, we provide you with a free copy of the policy on page 97 of the manual).
2. The meal has to be directly related to the ministry.
3. The meal has to occur directly before or immediately after a substantial business related activity. This means that the meal has to be immediately before or after the service.
4. The pastor must submit the reimbursement request using a church approved reimbursement form that allows him/her to document the purpose of the expense and how his/her spouse helped to serve a business purpose.
5. The pastor must attach the receipt to the reimbursement form.
Past abuses awaken the IRS
Reimbursements for entertainment expenses have often been abused, which has awakened the IRS to frequently challenge this transaction. It is important to keep impeccable records because otherwise section 4958 allows the IRS to attribute such expenses as unreported income and to issue fines of up to 225% of the transactions. As a minister who frequently had to turn in reimbursement request forms to my church, I made sure that I always made a copy of each receipt and reimbursement form for myself. If I ever got audited, I wanted to make sure that the records had not been misplaced. I needed to be prepared in case I had to explain my reimbursements. With possible fines of up to 225% of each transaction, this is one area in which you do not want to make mi