As a small-business owner or non-profit operator, you are faced the challenge of determining what expenses are personal and what is business/ministry related. This challenge is especially acute when personal activities also serve as a basis for relationship building activities that support the mission of the non-profit.
Let’s say that you were a US-based pastor working for a 501(c)3. You may spend the majority of your ministry time in the church office, special events, and in one-on-one visits with your parishioners/members. You rent an apartment and typically eat a couple meals a day and a cup of coffee/snacks in-between.
Roughly half of the meals/coffees involve some sort of ministry and you use the apartment to have people over for prayer and Bible study groups. You also incur travel expenses to/from various ministry-related meetups. Once or twice a week, you may bring flowers or a small gift (less than $25) to a home of someone that is in the hospital.
In this example, it would be reasonable for the pastor to claim that roughly half of his meals/coffees and travel were ministry-related. If a particular event involved a mix of personal and ministry purposes, then some portion of the bill could be considered ministry-related but not the whole bill. A portion of his rent might be considered ministry-related, depending on the use of space. The small gifts to people that are sick is clearly ministry-related. All of these expenses would be within the annual budget allocations that the Board approved and the church treasurer would monitor spending to ensure that any reimbursements were compliant with the Accountable Expense Reimbursement Plan (AERP) approved by the Board.
It would NOT be reasonable to claim, however, that all (or nearly all) of his meals, coffees, snacks each day were considered ministry-related expenses. Yes, he may be building relationships while eating lunch, but he eats lunch every day and this is covered by his salary. It would NOT be reasonable for him to claim that all (or nearly all) of his rent and/or transportation costs are ministry-related because this too is covered by his salary. In the unlikely event that he was audited, the IRS would likely consider this as an abuse of the tax-exempt status and, possibly, tax evasion.
Now, imagine that the pastor is a missionary in a foreign country and is living out of a suitcase. The apartment is replaced by lodging costs and the travel costs are likely to be higher, but the principles illustrated above still apply.
Please comment on how you have seen others properly define personal vs. business expenses in their small business or non-profit. Learn more about Norwood Consulting Group’s services and contact us for more info.
Norwood Consulting Group does not provide tax, legal or accounting advice. This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
