Deducting Business Expenses

Everyone is anxious to see what is in the final tax bill currently being negotiated in congress.  While I don’t typically spend much time looking at tax law changes until they are finalized, there are some deductions that appear to be going away – including the deduction for unreimbursed business expenses (form 2106), this is where many deduct business mileage.

Whether or not this deduction is eliminated in the final bill, it is one that we typically discourage for the following reasons.  There are limitations to the amount that can be deducted on the tax return.  First, you must reduce the amount of the deduction by the percent of your income that is non-taxable (ie: housing allowance).  Second, the amount that is allowed after the housing calculation is further reduced by 2% of your adjusted gross income.  Many times, over half of the deduction is lost after these calculations.  Furthermore, the tax savings is only a small percentage of the remaining deduction.  I have seen a deduction of $8,000 net a savings of only $1,600 in federal and self-employment taxes.

Our recommendation is to have the church reimburse all business expenses, including mileage.  If properly documented, the reimbursement is tax free.  It is much more beneficial to get a tax-free reimbursement at 100% than to save 20% in taxes.