OIH for Minister

[Edsel]

A minister has a W-2 for $53,000, all of which is designated as housing allowance.  (FMV of rent in exclusive area of Nashville now approaches $5000 per month, and they live smack in the middle-of-it).  There are zeroes in all the wage and withholding section, minister pays own self-employment tax.  The church, with knowledgeable CPA members, has issued the W-2 without influence from the preparer (me).

A paltry amount of Sch C revenue exists, as this is a children's minister.  Expenses far outstrip revenue on Sch C.  For SE purposes, this expenses are considerably prorated downward.

Minister has a dedicated office-in-home for classroom preparation and library.  Can the expenses of the OIH be applied as a deduction for SE tax?  It cannot be a deduction for Sch C since it would create a loss...

[BulldogTom]

I think the answer lies in what the office is used for.   If it is used regularly and exclusively in the pursuit of his schedule C income, then it would be allowed.   However, if it is used in the pursuit of his employment, it would not be allowed as employee business expenses are no longer deductible.

JMHO

Tom
Modesto, CA

[Margaret CPA in OH]

From Church & Clergy Tax Guide 2020: General rule-housing allowance precludes a home office deduction.

But check the audit guidelines for ministers.  Confirm the four requirements for a deduction - exclusive use, regular use, convenience of the employer and principal place of business.  The first and second may be fine but check on the employer convenience issue especially if the church has an office available and the last item may be an issue.

From the guidelines: In order for a home to qualify as a principal place of business...the functions performed and the time spent at each location where the trade or business is conducted are the primary considerations and must be compared to determine the relative importance of each.  and

The church often provides an office on the premises for the minister, so the necessity of an office in the home should be questioned closely.  Furthermore, since the total cost to provide the home is used in computing the exempt housing allowance, home office deductions for taxes, insurance, mortgage interest, etc. would be duplications.

While this doesn't specifically address an offset against SE tax and at least one exception was listed, I would be very hesitant to do that.  The exception listed showed that the minister used the home office to meet with members and it was the focal point of the ministry.  However, the housing allowance did not cover all housing expenses.  By the way, if the entire housing allowance is more than used up for housing and Sch. C is nearly a loss, how does this person live?  Asking for a friend.

[Medlin Software, Dennis]

Another case of someone giving a W2 when it should not be given...

[Lee B]

18 minutes ago, Medlin Software said:

Another case of someone giving a W2 when it should not be given...

The scenario as posted sounds very questionable

[Lee B]

This reminds me that about 15 years ago some prospective clients, husband and wife , who worked full time as independent commission agents for a merchant card services firm

approached me to prepare their tax return. They had purchased a custom made Class A RV Marathon Coach at a cost of about $ 1 Million.

They wanted my assurances that they could deduct the depreciation on the RV since "they used the RV as their mobile office."

When I explained to them why they couldn't do that, they left my office in a huff and went"accountant shopping".

[Edsel]

Thanks for all responses.  To my friend Margaret in OH, this "children minister" is married to a high income earner.  And their FMV rental value where they live is triple what was only 7-8 years ago.

I have chosen not to include the OIH, in part because of the responses on this forum.  Practically speaking, very few of the OIH deductions I have seen actually meet all four of the criteria listed in the discussion.  Meeting customers becomes eligible only with stretches of the imagination.  I generally shut off the OIH if the taxpayer has an office somewhere else, or else is simply not realistic.

Should this W-2 have been issued in this manner?  I wouldn't have, had the church retained me to do it.

 

 

[Lynn EA USTCP in Louisiana]

W2 is always proper for a minister employed under contract with a church. It should reflect housing allowance in box 14, zero social security, zero Medicare, and box 1 earnings in excess of the housing allowance.  I have seen W2’s with only the box 14 h.a. Entry.  There are examples in Hammar’s or Worth’s clergy resources. 

[Medlin Software, Dennis]

4 hours ago, Lynn EA USTCP in Louisiana said:

W2 is always proper for a minister employed under contract with a church.

I, and others, disagree.  If the only item on a W2 is "informational", then no W2.  There is zero requirement for HA to be on a W2, despite what many believe.  I understand, some believe the suggestion of including HA on a W2 is actually a requirement, but it is only a suggestion as a possible place to meet the notice requirement.

[Burke]

What I would question (and there is not enough information here to determine), is the $53K Housing Allowance designation.  If he is trying to deduct OIH, then he apparently owns the home?  Are you saying his mortgage interest, real estate taxes, utilities and other eligible housing expenses -- actual out-of-pocket -- equal or exceed FRV of $53K?  As the rule for exclusion is the lesser of the three -- FRV, HSA, or ACTUAL.   Did you do a worksheet?  I always do and put a copy in the return file.  And Medlin is correct; there is no IRS rule about showing the HSA on the W-2.   Then you have to get it from the church or paycheck stub.  But there is no rule that says they can't issue a W-2 either. 

 

[Edsel]

Hi Burke,

I can only confirm that FRV in the area they live is $54K, as utilities are included.  They moved there 7-8 years ago, and housing prices have tripled.  Unless you lived close to a metropolitan area as explosive as Nashville, you would find this hard to believe.  A relative of mine sold a house in Nashville 8 years ago for $139,000, and the same house sold six months ago for $400,000.  And this was not in an exclusive area like the minister above, this was middle-income neighborhood.  Nashville is now the largest city in the state, and I never thought I would live long enough to see it overtake Memphis.

If "actual" is entered for less, the difference becomes taxable wages, with no break on the SE tax, since the church has not withheld any FICA.

[Lion EA]

If taking the lesser of the three, and it's less than the HA, then the SE tax is lower than it could've been, too. The excess HA moves over to wages and is taxed for income tax purposes only and not for SE tax.