It was raining hard that day, and Pastor Giles once again noticed the old man walking around the neighborhood, pushing the shopping cart containing all of his belongings. Not caring about what would happen to his suit, Pastor Giles pulled into a parking lot, stepped out of his car, and offered to help the old man. Receiving the pastor's generous offer, they both walked into a sandwich shop where Pastor Giles proceeded to buy the old man a full meal, plus one to take back to the place he called home. Pastor Giles headed back to his car after a short exchange of words with the man, and then drove to a local gas station, at which he filled up his gas tank with the church credit card and went to the evening service.
It is legal to use the church credit card
All year long Pastor Giles has used the church credit card for transactions like the one described above. In fact, he has even used it to purchase his wife a new dress for their anniversary. Why is it legal? It is legal because the board of the church created a pastor's discretionary fund during the annual meeting. This is a special split fund that allows Pastor Giles the ability to use his own discretion on how the funds will be used. Pastor Giles has also used it to help the poor, assist a missionary, buy school supplies for a needy family, and donate to a local prolife group.
How to set it up
Because of the constructive receipt rule in income tax regulation 1.451-2(a), setting up a pastor's discretionary fund requires that strict guidelines be followed in order to make it legal and avoid the pastor paying unnecessary taxes or section 4958 penalties. Under the regulation, if any of the funds designated in the fund are personally available to him/her, then the entire fund is taxable to him. So the way we deal with that is to create a split fund. Under the church's policy, the fund has a portion that is restricted and a portion that is not restricted. The restricted portion can only be used at his/her discretion, so long as it is for ministry purposes and the unrestricted portion can be used as he/she wished without regard to its purpose. A sample discretionary fund policy follows below:
Pastors 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 2015. 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 but not limited to 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 to 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 to this fund.
The church shall include the $2,500.00 mentioned above in line 1 of the pastor's W-2 form.
Notice how the fund has a restricted portion of $5,000.00 and an unrestricted portion of $2,500.00. The only part that will be taxable to the pastor is the unrestricted portion.
Dealing with administrative burdens
This fund helps to resolve the administrative burden of formally documenting benevolence expenses before any funds can be distributed. Many times, pastors encounter on-the-spot needs that they would like to meet. By preapproving a designated amount in the pastor's discretionary fund, he/she will always know that at anytime a need presents itself, provided funds are available, he/she can simply meet it and not worry much about the formalities. Moreover, he/she can also use the church credit card for some personal expenses such as filling up the gas tank without having to fill out any paperwork for a reimbursement.
Strategies to grow and protect
Today, churches and ministries face many challenging laws and regulations that threaten their ability to maintain their existence, much less grow. We continually focus on how to make your church compliant in a way that will help it to grow. We do that by teaching church leaders how the Ultimate Church StructureTM ensures growth and protection. I challenge you to come to one of our conferences and learn what you currently do not even know you need. Your time spent with us for that day will be the biggest step forward in growing and securing the ministry God has placed into your care.