Valid Expenses for a Church or Ministry
Mark Helland, CPA

Mark Helland, CPA is a partner with the public accounting firm of Elliott, Dozier and Helland, PC (www.edhcpa.com) which is located in Tulsa, Oklahoma. Mark specializes in audit, outsourced bookkeeping and tax related issues for church and ministry clients across the United States. For further assistance from Mark on this topic or for assistance on any other tax, outsourced accounting or church audit and compliance need, Mark can be contacted via email at mark@edandhcpa.com or by phone at (888) 893-1259 or (918) 488-0880.

A common question our firm regularly receives from pastors and church business administrators regarding their organizations is “______ a valid expenses that can be paid for directly out of our ministry?” We always appreciate it when we are asked this question in advance because we know that we are talking with an individual who is trying to do the right thing. Unfortunately, in our audit practice and especially in our preparation of IRS Form 990’s, we regularly see expenses and transactions that appear to have questionable ministry purpose. Several factors are at work in determining if an expense is valid for a non-profit organization.

The first key point to consider in assessing whether an expenditure is valid for a church, ministry or any non-profit organization is to consider a very simple question – what would your donors think if they saw the check’s payee, amount and underlying documentation? Without regard to what IRS regulations say on the matter, the issue really is that simple. If you would be embarrassed or would find it hard to explain a church or ministry purchase, then it should give you pause to make the purchase. If more church and ministry leaders would follow this simple standard, many problems would be avoided with donors and potentially even an IRS auditor somewhere down the road.

In terms of IRS regulations, the standard for whether or not an expenditure is valid for a church or a ministry is really not that different as compared to the standard for a for-profit business. In the for-profit environment, a valid business expense is one that is considered to be an “ordinary and necessary expense” in the conduct of the business. The same standard applies to the “business” of operating a church or ministry and being a pastor, evangelist or missionary. In other words, as long as the expense is critical or necessary to the operation of your ministry, then the expense could potentially be considered to be a valid expense. Here is just a brief list of some examples of valid church or ministry expenses:

• Rent for a building for a church office
• Travel costs, including airfare, hotels, rental cars, etc.
• Meals and entertainment, while traveling or hosting others for ministry purposes
• Mileage reimbursements at the IRS standard mileage rate (subject to requirement to maintain a written mileage log)
• Tolls and parking
• Education expense, continuing education and training courses
• Office expenses and supplies, etc.
• Equipment expenses including computers, etc.
• Dues and subscriptions
• Pastor’s library items including books, magazines and other publications
• Business gifts, etc, etc.

While this is most certainly not a comprehensive list, this is a starting point for small church and ministry organizations when questions arise concerning expenses. It is important to note though that the concept of “ordinary and necessary” does have some limitations. IRS code regulations do explicitly prohibit many types of expenses. One example of a prohibited expense item is clothing. Pastors often want to pay for suits with ministry funds under the reasoning that such clothing amounts to a uniform. As mentioned in one of my previous articles, the IRS code specifically defines what amounts to a uniform, and suits specifically do not qualify. So, it makes sense to get a second opinion or do a little additional research if you have a purchase that may not be obvious as to valid ministry purpose. Additionally, it is important to note that many times an expense could appear to be invalid but additional documentation, such as notes or descriptions of the nature of the expense can help “prove” that the expense is valid. For example, expenses for an out of town trip such as airfare, hotel, etc. could appear to be personal in nature. However, when additional notes and documentation are present to show that this trip was for a training conference for a week, the expenses make sense and show a clear “business” purpose.

Additionally, it goes without saying that a comprehensive system of detailed and organized books and records for a church or ministry is of utmost importance. All non-profit organizations are required to maintain a set of records with full accounting for all transactions. While not required, ideally the accounting records of all churches and ministries records should be maintained in a “double entry” accounting system. The term “double entry” refers to the correct accounting treatment for transactions in which there is a “debit” and a “credit” entry for each transaction. Double entry accounting records are critical for appropriate treatment of transactions and the generation of accurate financial statements. If your accounting system is not double entry or if you can’t easily generate a set of financial statements then you need to contact a good CPA for help. Recent improvements to accounting software such as QuickBooks Online have made it very easy to outsource the accounting function in whole or in part to an outside CPA, thus saving money over the cost of maintaining an in house accountant.

Finally, since this article just barely brushes the surface of a complex issue, it is always good to ask questions if you have purchase/expense situations come up that don’t have an easy answer. We are here to help pastors, churches and ministries so let us know if you have questions regarding expenses that may come up periodically. It is much better to ask an expert than to risk your non-profit status with the IRS or to have donors question your financial decisions!

Mark Helland, CPA is a partner with the public accounting firm of Elliott, Dozier and Helland, PC (www.edhcpa.com) which is located in Tulsa, Oklahoma. Mark specializes in audit, outsourced bookkeeping and tax related issues for church and ministry clients across the United States. For further assistance from Mark on this topic or for assistance on any other tax, outsourced accounting or church audit and compliance need, Mark can be contacted via email at mark@edandhcpa.com or by phone at (888) 893-1259 or (918) 488-0880.

 

This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It is shared with the understanding that neither the author nor Tony Cooke Ministries is engaged in rendering legal, accounting, psychological, medical or other professional services. Laws and regulations are continually changing, and can vary according to location and time. No representation is made that the information herein is applicable for all locations and times. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

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