Ministers’ Housing Allowance Income Exclusion Upheld
By John M. Robinson, CPA
Under Internal Revenue Code Section 107, “Ministers of the Gospel” are allowed to exclude the following two items from their taxable income: 1) the rental value of a home, including utilities, provided to the minister as part of the minister’s compensation; or 2) the rental allowance paid to a minister as part of his compensation. In the case of a rental allowance paid to a minister, the allowance must be approved and documented in advance, prior to payment, by the employing church or other qualified organization. In addition, in the case of a rental allowance paid to a minister, the amount excluded from taxable income cannot exceed the greater of amounts expended for rent of a home, purchase of a home, and expenses directly related to providing a home (such as utilities and repairs). It is important to note that the items excluded from the minister’s taxable income may be subject to self-employment tax.
Recently, a case was brought against the Treasury Department claiming parts of Internal Revenue Code Section 107 violate the Establishment Clause of the First Amendment. The District Court in which this case was heard held that Paragraph (2) of this Code Section does violate the Establishment Clause of the First Amendment. The Treasury Department appealed the ruling. The Seventh Circuit Court of Appeals applied two tests in determining whether government action (in the form of Internal Revenue Code Section 107(2)) violates the Establishment Clause of the First Amendment. The first test of Section 107(2), which the Court of Appeals determined was met, is satisfying a three-part determination as outlined in Lemon v. Kurtman, 403 U.S. 602 (1971): Section 107(2) has a secular legislative purpose; the primary effect of Section 107(2) is neither to advance nor inhibit religion; and Section 107(2) does not cause excessive government entanglement with religion. The second test is the historical significance test outlined in Town of Greece v. Galloway. 572 U.S. 565, 576 (2014). The Court of Appeals found no evidence Section 107(2) has been viewed historically as an establishment of religion; therefore, the Court of Appeals held that Section 107(2) is constitutional and it reversed the judgment of the district court.
At present, the exclusion from income of ministers’ housing allowances is considered to be constitutional; however, this is an area that houses of worship and their leaders will want to continue to follow. The plaintiffs in this court case have not yet announced whether they will appeal to the Supreme Court, and there is no guarantee legislators will not take up this issue.
For organizations paying housing allowances to ministers, is your organization taking all of the steps to ensure that housing allowances paid to ministers are properly approved, documented, and reported? And for ministers, are you making sure you are properly reporting housing allowances received on your individual income tax return?
John M. Robinson Tax Principal, CPA
John is a tax principal and has worked at BRC since 2001. He is responsible for providing tax compliance and consulting services to a wide variety of clients. His primary industry experience includes individuals, manufacturing, retail and wholesale, and not-for-profit organizations. Education Appalachian State University – Bachelor of Science in Business Administration, Concentration in Accounting […]