I am disagreeing with the above as far as the schedule SE Adjustment Worksheet only. The Deason Rule applies to Federal & State Income Tax Deductions solely because you get a parsonage allowance that is tax free. Since it is Tax Free for Federal & State Income Tax, you must apply the Deason Rule. However, for Social Security & Medicare purposes you must add back in the parsonage allowance as Income on the SE Form and you can take the entire amount of your mileage deduction. It is not reduced by the Deason Rule. The reason is the entire Housing Allowance is Taxable for Schedule SE as it must be added back into income. Therefore, the entire amount is taxable for SE Income, therefore you can take 100% of your business deductions on the SE Form. Take a look at publication 517 in the tip section on page 10 in the middle column. It states, this: Reduce your otherwise deductible expenses only in figuring your income
tax, not your SE tax.
Then look at the worksheets in the Same Publication 517. Worksheet 1, figures the percentage of tax free income that must be applied to the pastor/minister's expenses thereby reducing it.
Worksheet 2 applies that percentage to the expenses.
Now look at Worksheet 3. Notice that line 6 on this line, states Total business expenses not deducted in lines 1 and 2 above (amount from line 5) . And look at Schedule C or C-EZ expenses allocated to tax-free income (from Worksheet 2, line 6). Line 6 in worksheet 2 is Nondeductible part of Schedule C or C-EZ expenses (multiply line 5 by the percent in line 1).
What is happening here is that Worksheet 3 is adding your W-2 income to the net profit of your schedule C which would include the Minister's expenses less the deduction, then it is adding back in the un-allocable portion which is the Non Deductible part of the expenses. Then it takes the income from the W-2 plus the housing allowance an any utility allowance and counts it all as income and deducts all the ministers expenses. It would be just common sense that the Deason Rule apply to Tax Free Income, which is for Federal Income and State Tax Deductions, but the Deason Rule does not come into play for the SE Schedule as all income is Taxable. There is no tax free income applied to the SE Schedule. It is all taxable, therefore the pastor gets to take his full deductions, or course limited to meals deductions of 50% and .545 multiplied by his mileage. The Deason Rule has not changed it's course. Note that Zondervan's 2019 Minister's Tax and Financial Guide, states, "Since the housing Allowance is not tax-exempt for self-employment purposes the IRS takes the position in their Minister Audit Technique Guide the the Deason Rule does not apply to the computation of a minister's self -employment taxes."
Also, in Turbo Tax you have an explanation statement that is sent with the tax forms regarding how you computed the tax deductions and you can e-file this. There would be an accounting tax control in Turbo Tax if you could not do that.
