Car Allowance? Mileage Reimbursement? Writing off mileage expenses on your taxes? Congregation-owned vehicle? 53.5 cents? 17 cents? 14 cents? What’s the best way to cover these costs? There are a variety of ways for congregations to reimburse clergy, staff and volunteers for the travel needed for ministry, and they have different advantages / disadvantages in terms of taxability, convenience, and confidentiality. See pages 97-99 of the Church Finance Handbook.
- The only way for a car allowance to be non-taxable is for it to be paid as a reimbursement for actual mileage driven with an accompanying log stating the date, mileage and purpose of the trip. For confidentiality, some clergy keep a more detailed record available in the case of an IRS audit, but just submit the broader log to the Treasurer. It is possible to receive the car allowance first, and submit the mileage log within 60 days, but only if you return any overage to the employer.
- If you drive an employer-owned vehicle, you must reimburse the congregation for any personal use.
- Why the different rates? Each year, the IRS establishes a per-mile rate for employee reimbursement, meant to cover gas, maintenance, insurance, excise taxes, and the cost of the vehicle. Anything above this rate is taxable income to the employee. The lower rates are meant to cover marginal costs only — gasoline and minor maintenance such as oil changes. The IRS sets the rate for medical travel and Congress sets the rate for volunteer mileage.
- If a congregation sets a budget, what happens if the employee is over or under budget?
- If the congregation agrees to pay the full budgeted amount, and the submitted mileage is under budget, then the excess should be paid through payroll as taxable income.
- If the budgeted amount is paid out before the end of the year, the congregation can use its budget process to determine whether or not to exceed the budget (see pages 41-42 of the Church Finance Handbook.) Keep in mind that many cars are cheaper per mile to own and drive, and therefore, an employee may receive enough to cover all expenses even if some mileage isn’t reimbursed at the IRS rate. Over the years you own a vehicle, if you add all costs (purchase less trade-in when you sell it, insurance, maintenance, gas) and divide by total miles driven, you can estimate the cost of your vehicle.
- Isn’t it easier, and more confidential, to deduct the mileage on your income taxes? It is more confidential, but not any easier since you’d have to keep a mileage log either way. Keep in mind that the proposed tax changes for 2018 reduce the number of people who will itemize deductions (Schedule A) and may eliminate the deduction for unreimbursed employee business expenses. If you are legitimately self-employed (supply pastor, weddings/funerals, temporary interim), then deductions on Schedule C remain a good option.
It’s complicated! Your tax advisor can assist you to find the best way to maximize the resources you have available for your ministry.