Current Tax Issues for Clergy and Congregations

Issues relating to clergy and congregations continue to move across the radar screen at a rapid pace in 2010. Gone are the days when significant issues affecting the church occurred only occasionally.

Here are the latest developments that may be of interest to you.

Clergy housing allowance.

Late last year the "Freedom from Religion Foundation" filed a complaint in a U.S. district court seeking a declaration that sections 107 and 265(a)(6) violate the Establishment Clause and First Amendment of the Constitution by providing preferential tax benefits to ministers of the gospel. The complaint calls on the court to enjoin the IRS from allowing such benefits.

The plaintiffs are represented by Michael Newdow, who also brought an unsuccessful challenge to the constitutionality of the phrase "under God" in the Pledge of Allegiance. The first hurdle for the plaintiffs was to establish taxpayer standing. Each individual plaintiff claims to be a federal and California taxpayer opposed to government endorsement of religion.

In May, the court refused to throw out the lawsuit. So, the challenged tax benefits could be defended as permitted accommodations of religion, as attempts by the government to avoid excessive entanglement, and because this tax benefit is not available solely to ministers of the gospel. For example, other categories of taxpayers, such as members of the military, also are entitled to housing allowance exclusions and benefits. Additionally, certain employees are entitled to exclude the value of housing and meals provided for the convenience of the employer.

Should this lawsuit be successful, it would result in significant adverse financial impact on ministers and churches. In addition, success here could encourage challenges to other benefits and exemptions provided to churches and religious organizations, although establishing taxpayer standing remains a significant obstacle. Were the section 107 housing allowance exclusion to be found unconstitutional, certain ministers of the gospel who are required to live in employer provided housing, e.g., parsonages, could continue to exclude the value of housing under the generic provisions of section 119.

The HIRE Act could benefit your congregation.

The HIRE (Hiring Incentives to Restore Employment) act:

• Exempts congregations from paying the employer share of Social Security employment taxes on wages paid in 2010 to newly hired qualified unemployed workers-a so-called "tax holiday." These are workers who: (1) begin employment with the employer after February 3, 2010, and before January 1, 2011; (2) were previously unemployed; and (3) do not replace other employees of the employer. The payroll tax relief applies only for wages paid with respect to employment beginning on the day after the enactment date (the date the HIRE Act is signed into law by the President) and before 2011.
• Provides employers with an up-to-$1,000 tax credit for retaining qualified unemployed workers. The workers must be employed by the congregation for a period of not less than 52 consecutive weeks, and their wages for such employment during the last 26 weeks of the period must equal at least 80 percent of their wages for the first 26 weeks of the period.

Update on congregation-provided cell phones.

Earlier this year, the House passed a package of provisions designed to aid taxpayers, including language updating the tax treatment of employer-provided cell phones and other mobile devices. However, the Senate has not acted on this legislation. Health care, financial reform, and the oil spill in the Gulf have absorbed Congress to the point that cell phone legislation does not receive priority.

In 1989, Congress added cell phones to the definition of "listed properties" and required employers to keep detailed logs of all employee calls, text messages, and emails in order to take a deduction. At the time, cell phones were viewed as a luxury perk for corporate executives. Cell phones, BlackBerrys and other PDAs are viewed more commonly today as integral tools for daily business activities. Even IRS Commissioner Doug Shulman said earlier this year his organization had suspended any update of rules for taxing employer-provided cell phones and other mobile devices in expectation that Congress would soon change the antiquated law. However, there is no indication the IRS is not enforcing the recordkeeping requirements for cell phones.

Removing cell phones from listed property is estimated to cost $411 million over 10 years, and must be offset by provisions that raise revenue.

Dan Busby is a certified public accountant, president of the Evangelical Council for Financial Accountability (ECFA), and the author of the Zondervan Clergy Tax & Financial Guide.

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