Giving – Donor-Restricted or Designated Gifts

Giving Basics #2 – Donor-Restricted or Designated Gifts

Donor Restricted

Those troublesome designated funds

Donor-restricted gifts, also referred to as Designated Gifts require special accounting and handling by the church. These types of gifts should be minimized. We would suggest, that instead the church create a well-documented and planned budget in line with their vision and donors, by voting on this budget, agree to the church spending plan. Then, all giving funds are credited to the general church budget.

Designating funds to particular ministries or functions creates greater bookkeeping headaches, and limits the ability of church leadership to adjust spending as for various circumstances. Your church can literally be “designated broke”. Meaning so much of the funds are designated to specific purposes that the church cannot operate properly.

In addition, designated funds may not be tax-deductible. The IRS requires that the ministry leadership MUST have the discretion and control of the funds. Secondly, consideration as to whether the gift is actually donor-restricted or donor-preferenced.

A donor restricted gift is accompanied by a donor statement to the effect that “this gift is made on the condition that,” or “this gift is restricted to the building fund”. It is upon the church to spend the funds as requested. When a donor expresses only a desire or suggestion as regards to the use of their gift, it is considered a donor-preference gift. Both types of gifts may be tax-deductible as long as the restriction or preference is in line with the church’s overall mission and purpose and the church has discretion and control of the funds.

The giver’s intent MUST be to benefit the ministry and the church MUST have discretion and control of the funds.

What about Short-Term Mission Trips?

The handling of funds raised and expended for these trips often present challenging finance and legal issues. These trips may be funded in a variety of ways:

  • Funded by the general budget. This is appropriate and legal if the mission trip is consistent with the churches tax-exempt purposes.
  • Funds provided by the participants. These donations to the church to cover direct payments for trip related expenses are generally considered a tax-deductible gift.
  • Funds provided by church members or others for trip participants. These gifts generally qualify as a tax-deductible gift. The ministry is obligated to spend the funds for the intended purpose, i.e. the mission trip, even if the individual soliciting the funds drops out of the trip. It is a good idea for the church to communicate to the givers that it is their policy to redirect gifts if the trip is canceled or more funds are received than needed. If the funds are not given with this understanding and are expected to be returned if the participant drops out, then the intent does not meet the IRS intent test and the gift would not be considered tax-deductible.

Gifts to Staff

Gifts to employees may be handled in different ways depending on the details, for example:

    • Gifts by an individual DIRECTLY to the staff member. There is no tax issue or reporting for the church.
    • Gifts by an individual given to the church and “earmarked” for an individual. These are NOT tax-deductible gifts and are considered taxable income to the recipient. Gifts to bless “multiple” staff members and for which the church determines recipients and allocation of the gifts are generally tax-deductible to the giver.
    • Gifts to staff from church funds. These gifts are to be included in taxable income via the payroll system except for:
      • De minimis gifts – Generally less than a $25 value (gift cards ARE included in taxable income).
      • Achievement gifts – there must be a written policy in place providing the requirements for earning this type of gift and there are limits on the value.
      • Benevolence gift – a staff member may receive a non-taxable benevolence gift if the gift is processed in the normal means that other benevolence gifts are awarded.
    • Gifts for benevolence
      • A gift from a church member directly to the needy individual are not tax deductible.
      • A gift to a ministry, who then determines the recipient through normal benevolence policies, is generally tax-deductible. If the giver makes a suggestion as to the recipient, it may still be deductible if the church exercises proper control over the benevolence fund.
      • When there is a major life situation where the church wants to solicit funds for a family who, for example, has large medical bills, such gifts are considered personal and therefore not tax deductible even if processed through the church. These gifts may be taxable income to the recipient. Churches may wish to pursue a trust fund for the family for which the gifts are still NOT tax-deductible, but they would not be taxable income to the family.

Giving/Donations is probably the area we receive the most questions from churches. It is complicated and needs to be handled correctly to protect your churches tax-exempt status. Is your church handling donations correctly? Does your congregation understand the implication of designating gifts? Contact GoodBooks today for a free consultation.

While there are many other giving situations, we will stop here. Please access the ECFA Church and Nonprofit Tax & Financial Guide and/or the Church & Clergy Tax Guide or your local tax professional for more information.

Source: Zondervan 2020 Church and Nonprofit Tax & Financial Guide for 2019 Tax Returns. It is not intended to provide legal, accounting or professional advice.