This month’s column is written in response to a priest who asked a question regarding whether the costs of travel to assist at a wedding for his niece were tax deductible. He writes, “In May of this year I was asked by one of my nieces to officiate her wedding in California. I incurred the expenses of plane fare (round trip from Chicago to LA), hotel, meals and car rental. I was not compensated or reimbursed for any of my out-of-pocket expenses by any family member or anyone else. My niece and her husband do not have the financial resources to pay me for my travel. Can I deduct any of these expenses as professional expenses on my income tax return?”
For a ministry-related expense, which the IRS terms a “business expense,” to be deductible, it must be an ordinary and necessary expense of the taxpayer’s trade or business with the reasonable expectation of earning a profit. To convert the IRS terms to those applicable to a priest’s ministry, the “trade or business” for a priest is his ministry. The expectation of “earning a profit” is the reasonable compensation for his services.
The IRS defines an “ordinary” expense as one that is common and accepted in the taxpayer’s trade or business. No one could reasonably argue that incurring travel expenses for a priest to assist at a wedding is uncommon. Therefore, the first requirement is met.
The second requirement, that the expense is “necessary” could raise concern until the IRS explanation of the term “necessary” is considered. While the trip was not absolutely necessary in that the priest could have declined to assist at his niece’s wedding, the IRS has a less stringent application of the term “necessary.” The IRS states that a necessary expense is one that is helpful and appropriate for the taxpayer’s trade or business. An expense does not have to be indispensable to be considered necessary. Under the IRS explanation of the term “necessary,” the travel expenses clearly qualify.
It is the third IRS requirement, that the expense is incurred with the reasonable expectation of earning a profit, that results in the disallowance of the travel expenses as deductible for income tax purposes. The priest stated that he was not compensated or reimbursed for any of his out-of-pocket expenses. While it is true that priests often, or sometimes even usually, perform services without the expectation of earning money, they are part of the priest’s duties compensated through his monthly salary. Assisting at a wedding for his niece in another state is beyond the services contemplated in a priest’s compensation package. The facts and circumstances of the arrangement must qualify under IRS rules on their own. The IRS would argue that the main reason the priest traveled to assist at the wedding was because it was for his niece and, therefore, it is a personal trip.
A follow-up question could be, “Could the priest deduct his expenses if he were compensated?” For example, if his niece gave him a stipend of $500, would that change the nature of the services qualifying the associated expenses as tax deductible? The answer is that the priest may deduct his travel expense to the extent of his stipend. If his airfare, hotel and car rental expenses totaled $1,200, he could offset the otherwise taxable stipend of $500 with his expenses, but he could not deduct the $700 of his travel expenses in excess of the stipend.
Unfortunately, for tax purposes, the IRS considers the trip a personal expense and, regardless of the fact that assisting at a wedding is clearly within the “trade or business” of being a priest, it is not tax deductible. TP