Deason Rule Statement on Sked SE

[videot7]

I am a minister and am considered to be self-employed for both income and self-employment taxes.  I get a 1099, not a W2.

I am trying to apply the Deason Rule by prorating my business expenses on Sked C by the percentage of my housing allowance to the total income.  Most of the advice I've read on the Deason Rule says to add the amount of the housing allowance to the net of Sked C to determine the amount of Sked SE income.  Basically as follows:

Original 1099 income:   40,000.00

Housing Allowance: 10,000.00

% of housing allowance: 25%

Business Expenses: 5,000.00

25% of Expenses as per Deason Rule: $1,250.00

Reduced Expenses as per Deason Rule: 3,750.00

Net Business Income on Sked C: 26250.00

Most instructions then tell you to add the housing allowance back in to get the income to place into Sked SE.  In this example:

Income on Sked SE, Section A, Line 2: 36,250.00

Turbo Tax Home and Biz adds back the housing allowance properly for Sked SE, although you have to do the Deason reduction manually.

However, in searching the web extensively, some instructions imply that there is an additional calculation that can occur to reduce taxes:  For example at https://ttlc.intuit.com/community/business-taxes/discussion/i-am-a-clergy-but-receive-and-enter-wage... , @Opus 17 implies this and makes reference to the "Deason Rule Adjustment" which has to be made manually in Turbo Tax in Forms mode.  However, the details of the Deason Rule were not within the scope of that post, and he suggested that further inquiries of the Deason Rule be made in a separate post.

Another clue that I have for this calculation is our 2009 taxes, which were done by a tax preparer who was knowledgeable in the implementation of the Deason Rule.  However, 2009 was his last year before he retired and so I no longer use him.

Anyway, he took the amount of the reduction, in this case: 1,250.00 and subtracted it from the adjusted total for Sked SE.  In my example, the new adjusted total for Sked SE, Line 2 became: $35,000.00

He then wrote out an explanation citing the Deason Ruling Court case and showing the reductions that occurred and how he determined the amount on Line 2.  This explanation was on a separate page, which he attached to our return.

My questions are this:

1.  Does anyone know if this is a valid way to calculate income for Sked SE?  Our preparer had done it this way for 14 years and we were never audited on it.  However, I fully recognize that last return he did for us was 10 years ago, and I don't think anything has changed, but I want to make sure before I go doing things this way. (I will include the wording of his statement in a comment below)

2. Since Turbo Tax isn't doing this automatically, I will have to go in on Forms mode to make the change.  However, I would also need to attach this statement and the corresponding calculations.  Am I to assume that there is no way to add this statement to TT, and so I will not be able to file electronically?

Thank you for any help you can give.

Videot

[videot7]

Here is the text used by my preparer in 2009 for the additional statement attached to our return:

(I have substituted original numbers for the amounts given in the example above)

Statement For Schedule SE - Part I, Line 2
Schedule C - Minister 26,250.
Change in Schedule C deductions (see below)    ( 1,250.)
Minister's housing allowance 10,000.
Total to Schedule SE - Part I, Line 2     35,000.
Statement for Schedule C, Line 28 (Total Deductions)

The tax-exempt housing allowance exclusion of 10,000 is 25% of total
ministerial income. Following 'Deason v. Commissioner', 41 T.C. 465 (1964),
deductions were reduced on Schedule C by the amount allocable to the
tax-exempt income. This rule does not apply to amounts subject to
Self-employment tax. Accordingly, Schedule C income must be adjusted.

(He then lists Schedule C Expenses, showing the original total for each category, the amount allowed by Deason, and the amount of the Deason reduction)

Finally, he gives the Deason % calculation:

Housing / Total Income = % Reduction

10,000 / 40,000 = 25.00%

[Opus 17]

First, be aware that many posts have incorrect dates because they were mass-transferred to new board software, and may have been several years old at the time.

If you are a W-2 minister, you have tax assessed in two places, income tax on line 7 of form 1040 for your W-2 box 1 wages, and schedule SE for your (wages+housing).  Before tax reform, you could deduct work expenses from your taxable income subject to income tax using form 2106 as a misc itemized deduction subject to the 2% rule.  These work expenses were also subject to the Deason rule of course.  Separately, I have told people that they can reduce their income subject to SE tax by adjusting schedule SE to reflect those same business expenses.  They were not subject to the 2% rule but I always treated them as subject to the Deason rule.  Post tax-reform, the itemized deduction for W-2 employee expenses is disallowed but ministers can still deduct work related expenses from Schedule SE. .

As a 1099/Schedule C minister, by making the Deason adjustment to schedule C instead of schedule SE, you are already deducting your work expenses from both your income subject to income tax and your income subject to SE tax.  

By adding the Deason adjustment back to schedule SE, you would be reducing your expenses according to the Deason rule for your income tax, but taking the full expense deduction on your SE tax.  I've never heard of that before and if there is some nuance in the Deason court ruling, I am unaware of it.  I see your accountant's explanation but I don't know if it's true.  

This is one of my main resources.

https://www.ecfa.org/PDF/MinTax_Preparing_2019.pdf

It's up to you of course, if you want to apply the thinking from your 2009 accountant.  I couldn't confirm or refute it without much more research than you are paying me to do 🙂

[videot7]

You said:

By adding the Deason adjustment back to schedule SE, you would be reducing your expenses according to the Deason rule for your income tax, but taking the full expense deduction on your SE tax.  I've never heard of that before and if there is some nuance in the Deason court ruling, I am unaware of it.  I see your accountant's explanation but I don't know if it's true.  

This is one of my main resources.

https://www.ecfa.org/PDF/MinTax_Preparing_2019.pdf

========================

First of all, thank you.  Both for your response and for your time.

I worked through the Deason "math" at your link above, it supports NOT adding back the Deason adjustment. 

I was able to check out the 2019 Church & Clergy Tax Guide by Richard Hammar from my university's library.  I had him as a professor in Bible College and he is our denomination's chief legal counsel.  It is a 700+ page tome, with an extensive example that includes Turbo Tax Tips as well.  He is quite conservative in his interpretations and because of the structure of our denomination, my tax preparer likely took advice from him back in the day.

Since I am almost done with my lunch hour, I will look through his example and work through his Deason Math at a later time.  I will report back my findings here.

[videot7]

Apparently, there is something to this, at least as far as Hammar's Church & Clergy Tax Guide 2019 is concerned.  On page 339 he says:

"Since a housing allowance is not an exclusion in computing self-employment (Social Security) taxes, no reduction in business expenses is required in computing these taxes on Schedule SE.  This understanding is affirmed in the IRS audit guidelines for ministers and in 2019 IRS Publication 517.  It was questioned in a 2005 Tax Court Decision, Young v. Commissioner, T.C. Summary Opinion 2005-76."

It took some scouring but I found the reference in Pub 517 on page 10 at https://www.irs.gov/pub/irs-pdf/p517.pdf  in the form of a tip in the middle of the page: "Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax."

I found the reference in the audit guidelines at https://www.irs.gov/pub/irs-utl/ministers.pdf  on pages 15 and 18, in which they gave Example 8 and used total expenses in calculating Sked SE instead of the Sked C deductible expenses.

Finally, Hammar addresses the tax court question on page 338 with the following: "Fortunately, this case is a 'small case,' meaning it cannot be cited as precedent."

I was fortunate to have found this book in our library.   However, I haven't decided whether to do it this way.  Like you, @Opus 17 , I leave it to future readers to decide this on their own.  If nothing else, I have found documentation which seems to support this other method that my 2009 tax preparer used.  But I am curious if you have any opinions about what I found this evening.

Thank you again for your time and help.

[videot7]

I should add that Hammar states that I will need to adjust Self-Employment Income manually in Turbo Tax.

[Opus 17]

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@videot7 wrote:

I should add that Hammar states that I will need to adjust Self-Employment Income manually in Turbo Tax.

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You can only do this in the desktop version of Turbotax, installed on your own computer from a CD or download.  It can't be done online.  To make the adjustment, switch to Forms mode and find the Sch SE Adj Wks in the list of forms.  Entries related to clergy wages and housing are lines 5a-5c I believe.  You may be able to add the negative adjustment on line 5c, or you may need to override the value on line 5a.  Note that if you make any manual entries in forms mode, you will void the accuracy guarantee, and if you make an override, that blocks e-filing (but you're supposed to file by mail with a written statement anyway). 

[videot7]

Thanks for the information.  I have the downloaded version, but didn't know the sequence to follow.  Do you know if it voids the optional audit coverage that Turbo Tax offers if I purchase it?

[Opus 17]

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@videot7 wrote:

Thanks for the information.  I have the downloaded version, but didn't know the sequence to follow.  Do you know if it voids the optional audit coverage that Turbo Tax offers if I purchase it?

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Audit Defense is a third party service.  I don't know what their terms of service are.  Sorry. 

[Opus 17]

Basic info on Audit Defense is here.

https://ttlc.intuit.com/community/using-turbotax/help/what-is-audit-defense/01/25537/highlight/true#...

The service agreement is here.  It does not seem to exclude a situation where you override Turbotax's entries, but I am not an attorney.

https://intuit.taxaudit.com/prepaid-audit-defense-1