Everything of value the church provides to the pastor in return for their services is considered taxable compensation. The value of the car must be included on the pastor’s W-2 as taxable wages. The pastor will have to pay self-employment tax and federal and state income tax on the value of the car.
The church has the option of purchasing a vehicle for church use. If the vehicle is purchased for church use and is titled and insured in the church’s name, then the church can list the vehicle for depreciation. However, in that case, the pastor can only use the vehicle for official church purposes. If the pastor is allowed to use the vehicle for personal use, the value of the personal use must be counted as taxable wage income to the pastor and include it on their paystub and W-2. The IRS provides a couple of different formulas on how to calculate the value of personal use, but that’s not relevant to you because your church gave the car to the pastor and titled the car in the pastor’s name.
The church can’t depreciate the car because the church does not own the car. The church simply paid the pastor an extra $50,000 in wages which happened to be in the form of a new car.
Most pastors are considered common law employees of their church and should receive a W-2, although only taxable income in box 1 will be filled out, because the church is not required to withhold federal, state or, Social Security and Medicare tax. The pastor pays two kinds of tax on their tax return, income tax and self-employment tax. The pastor cannot deduct work related mileage from their income tax because that deduction was eliminated for 2018–2025. (It was formally a miscellaneous itemized deduction subject to the 2% rule using form 2106.)
However, the pastor can deduct work related mileage from their income subject to self-employment tax, using the schedule C adjustment worksheet line 5c. To deduct work related mileage, the pastor must keep a diary or mileage log showing the date, mileage driven, and the business purpose of the trip. Only mileage driven on official church business may be deducted, although for a pastor this could include things like pastoral calls and visits because that is an ordinary and necessary part of their job. The pastor can deduct mileage using the standard mileage method or the exact expense method. The standard mileage rate is 58.5 cents per mile from January 1 to September 30 and 62.5 cents per mile starting October 1. The only expenses that can be added to the standard mileage amount are parking and tolls, because the standard mileage amount includes allowances for fuel, repairs, maintenance, insurance, and depreciation. To use the exact expense method, the pastor can deduct fuel, maintenance, repairs, insurance and depreciation. In addition to a mileage record of all of his work related trips, the pastor will have to keep records of all of the car expenses for the entire year as well as the total vehicle mileage, both personal and work related. Add up the total car expenses and take the percentage of the expenses equal to the percentage of work related travel. Because these calculations (using either method) are not supported in the schedule SE adjustment worksheet, the pastor will have to figure out their mileage deduction manually and enter the final total. They should keep their records for at least three years in case of audit.
I suspect this is not exactly what the church intended when it purchased a vehicle, but this is what you are stuck with since the church gave the vehicle to the pastor. Even if the pastor returned the vehicle to the church, it is still taxable income to the pastor in the year the vehicle was given to the pastor, and there is no deduction or adjustment if the pastor gives it back.
