Clergy, Mileage Logs and The IRS

Church Leaders Should Understand The Mileage Code

It is important for church leaders to recognize that the tax code imposes strict limitations on the use of the standard mileage rate.

A taxpayer kept a log of his travel. Each day, he noted the beginning and ending mileage but did not note each place he stopped or the business purpose of the stop. For three years he claimed deductions for 67,910 miles, 62,456 miles, and 58,616 miles for the business use of his cars. The IRS audited his returns for these years, and denied a deduction for any of these miles on the ground that they were not adequately substantiated. The taxpayer appealed to the Tax Court. Royster v. Commissioner, TC Memo. 2010-16 (2010)

The court noted that a deduction is not allowed for the business use of a car unless the taxpayer substantiates:
(1) The amount of such expense,
(2) the time and place of the travel, and
(3) the business purpose.

In the absence of adequate records, a taxpayer "may alternatively establish an element by his own statement, whether written or oral, containing specific information in detail as to such element" and by "other corroborative evidence sufficient to establish such element." However, the tax code specifically precludes the deduction of automobile expenses on the basis of an approximation or a taxpayer's uncorroborated testimony.

Why it matters to churches
The standard mileage rate is a convenient way for taxpayers to compute a tax deduction for the business use of their car. Employers, including churches, can use the mileage rate to compute the amount of a reimbursement to be paid to employees for the business use of their cars. In either case, it is essential for the taxpayer to be able to prove the following:

The miles for each business use of the car;
*Total miles driven during the year;
*Date of each trip;
*Business destination;
*Business purpose.

A failure to maintain a logbook or other documents that substantiate these items may result in the denial of a tax deduction, or in the treatment of an employer reimbursement as nonaccountable (and therefore reportable as taxable income).

Church Clergy and Taxes

Prior to 1968 a member of the clergy had to elect to be covered by social security.

If you are duly ordained, commissioned, or licensed minister of a church, you are covered by social security and Medicare under the self employment tax provisions for the services you perform in your capacity as a minister unless you have requested and received a tax exemption from self employment tax. This is true whether you are an employee of your church or a self employed person under the common law rules.

Unless an ordained member of the clergy objects to social security benefits based upon conscientious or religious grounds he/she is subject to self employment tax. To object you must file Form 4361. The form must be filed before the due date of your tax return for the second taxable year in which you earned $400 or more from work as a member of the clergy. The social security self employment tax exemption is irrevocable.

What is duly ordained, commissioned, or licensed minister of a church? The term duly ordained minister of religion means a person: {who has been ordained in accordance with the ceremonial ritual or discipline of a church, religious sect, or organization established on the basis of a community or faith and belief, doctrines and practices of a religious character}, {who preaches and teaches the doctrines of such church, sect or organization}, {who administers the rites and ceremonies thereof in public worship}, {who, as his/her regular and customary vocation, preaches and teaches the principles of religion}, and {who administers the ordinances or sacerdotal duties of public worship as embodied in the creed or principles of such church, sect or organization}.

Although as a licensed ordained, commissioned or licensed minister you are considered a self employed individual for social security purposes, you may be considered an employee for other tax purposes or putting it bluntly you are considered an employee by the IRS.
Self employment tax does not apply to any post-retirement benefits or the rental value of any parsonage or parsonage allowance.

Under these tax rules, you are considered an employee or a self employed person depending on all the facts and circumstances. Generally, you are an employee if your employer has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action.

If you are not considered an employee in performing your ministerial services, you will figure taxable net earnings on Form 1040, Schedule C. Figure your self employment tax on Form 1040, Schedule SE. If you earn or receive taxable income during the tax year that is not subject to tax withholding, or if you do not have enough income tax withheld, you may have to pay estimated tax.

The law requires all churches to apply for an Employer’s Identification Number (EIN) even if they do not have employees. Much like an individual’s social security number, your EIN (federal identification number) is used as an identifier on all federal tax returns and on all correspondence with the IRS. A State tax number should not be confused with a Federal Employer’s Identification Number (FEIN). Possession of an EIN is NOT evidence of tax-exempt status. You can apply for your EIN (Form SS-4) immediately from the comfort of your computer.