There are advantages for synagogues in being classified as a religious organization.
Regular not-for-profit organizations have to file a 990 annually with the Internal Revenue Service. Like our own individual tax filings. If the organization’s revenue is more than $1 million, an annual audit by a CPA is also required. Synagogues have no such requirements. In the spirit of transparency with congregants, an annual audit is always a good thing. But it is not a requirement for religious organizations.
Being able to offer ordained clergy a Parsonage – a housing allowance – is another advantage for synagogues through their IRS classification as a religious organization.
Parsonage is really a “win-win” for both the clergy and the congregation. It has been part of the tax code since the U.S. income tax system was created back in 1913. That amount of salary devoted to expenses for housing that ordained clergy incur – mortgage or rent, real estate taxes, utilities, maintenance and upkeep, are not subject to Federal tax.
What is the financial impact? I examined my own housing costs from when we owned a larger home two years ago. For our house, housing costs which include mortgage, real estate taxes, insurance, utilities, and maintenance, amounted to approximately $40,000. We are in a 25% tax bracket. If I was an ordained rabbi or cantor, that $40,000 of income wouldn’t have been subject to federal income tax. It would have also meant that we would have had an additional $11,500 in disposable income.
A few years ago, I wrote about this topic, as well as about a Wisconsin lawsuit that was making its way through the Federal courts. Its intent was to declare the clergy housing allowance unconstitutional. In 2014, a Federal Court of Appeals struck down the lower court ruling.
Recently, in a new case brought by the Freedom from Religion Foundation before the Federal District Court for the Western District of Wisconsin, the same Federal Judge struck down the ministerial housing allowance as an unconstitutional preference for religion.
So, what does this mean to synagogue leaders and to clergy? This case will probably take several years to work itself through the Federal Court system. And it will probably end up before the U.S. Supreme Court.
It is important for synagogue leaders and clergy to be aware that the housing allowance remains under attack. One blog I read noted that the Wisconsin judge’s ruling may be affirmed on appeal and applied nationwide by the IRS. Should this happen, this will have a direct impact on our clergy as well as on synagogue budgets.
Clergy will experience an immediate increase in Federal income taxes. In my example noted above, I would have been required to pay an additional $11,500 in income tax.
Should this happen, synagogue leaders may want to increase the compensation packages for their clergy to offset the financial impact. For synagogues with multiple clergy, such financial impact will of course be greater.
I am not sure that there is anything synagogue leaders can do at this point. Other than wait.