Discretionary Funds
The subject of clergy's discretionary funds often raises questions from both clergy and lay persons. Since clergy can unknowingly run afoul of IRS tax regulations, we thought it wise to provide this reminder on proper use of these funds. According to our canons, discretionary funds are to be used for the poor and for other "charitable and pious purposes," (Title III, Canon 14[f]). These funds belong to the congregation and are entrusted to the rector for proper distribution.
With regard to taxes, money flowing from a church to the clergy for the clergy's personal use is generally taxable as income to the clergy. Money given in exchange for services is taxable as income. Gifts are deductible only if given to an exempt organization, such as the church, but not if given to an individual, either directly or indirectly. In short, the discretionary fund is not the personal property of the rector.
Traditional uses of discretionary funds are: payments for gas, food, rent, utilities, medical bills and the like for the poor; vestments, books, other professional items which will remain the property of the church when the clergy leaves; entertainment of persons directly related to the church's ministry; membership in groups that are related to the exercise of ministry.
If you have questions about this important subject, please refer to the Manual of Business Methods in Church Affairs, chapter five, page 65 (PDF).