~~How to Know if a Contribution is Actually Charitable
Multiple times per month, I receive calls from various churches around our state asking about whether or not the IRS considers certain contributions charitable. This is an issue all treasurers and financial secretaries must take the time to understand, because not all gifts made to a church are considered charitable, and not all charitable gifts will appear on a contribution statement.
Section 170 of the U.S. Tax Code allows charitable organizations, like churches, to grant charitable giving credit to those who make contributions of money or property. If a person itemizes their deductions when they file their income tax return, they may add those charitable contributions to their deductions. Since the IRS scrutinizes deductions very closely in an audit, church financial leaders would do well to understand what criteria the IRS uses when determining whether or not to allow a deduction for charitable purposes.
According to the Church and Clergy Tax Guide2012 (p. 354), a gift is considered charitable if it meets the following six criteria:
• It is a gift of money or property.
• It is claimed as a deduction in the year in which the contribution was made.
• It is unconditional and without personal benefit to the donor.
• It is made “to or for the use of” a qualified charity.
• It is within the allowable legal limits.
• It is properly substantiated.
Here are some key points and examples to consider:
• Only gifts of money and property are considered charitable. Personal services are never considered charitable by the IRS. So, if one of your church members who owns a lawn service mows your church’s lawn all summer at no cost, he or she may not have the value of that service added to his or her contribution record at the end of the year. However, any expenses he or she incurs while performing the service for the church (gas, mileage ($.14 / mile, etc.) may be deducted from his or her income tax return. (Note: The value of these expenses is not added to his or her contribution statement either. The individual must substantiate the deduction himself or herself.)
• Only gifts of cash or check may be added to a donor’s contribution statement. The member who gives a non-cash gift item, such as office supplies, a new ice machine, etc., to a church should keep his or her receipt(s) and be given a non-cash gift letter, typed on church letterhead, and signed by the financial officer of the church. For a sample non-cash gift letter, click here. (Note: Special rules apply to donated vehicles. For more information about a church’s responsibility when given a vehicle, click here.)
• The gift must be claimed in the year it was given. Gifts must be received by the church or postmarked by December 31 to be claimed for the current tax year. Gifts received after December 31, unless postmarked by December 31, will be credited to the next year’s contributions.
• The gift must be unconditional and without personal benefit to the donor. This is a very important point. For a gift to be considered unconditional, the donor has to give up administrative control of the gift to the church. This does not mean a donor is not allowed to give money to an already approved designated fund, such as a building fund or a new van fund. However, it does mean that a gift may never create a line item in your church’s designated funds. If a person writes a check that is designated to a “new building fund,” but the church has no new building fund, the check should be returned to the donor, because it would not be considered a charitable gift.
• The gift must be made “to or for the use of” a qualified charity. Churches fall under section 501(c)(3) of the tax code. Therefore, they are qualified non-profit organizations. This point goes hand in hand with the previous one. Churches must maintain administrative control of a gift in order for the gift to be considered charitable. Consider this example. Bob and Judy, members of your church, lose their house in a fire. On Sunday morning, the pastor announces from the pulpit that a “love offering” is going to be taken for Bob and Judy to give them financial assistance. All checks should be made payable to the church, designated to the benevolence fund for Bob and Judy. In so doing, this pastor has just taken gifts that could have been considered charitable and made them nothing more than pass through gifts to Bob and Judy, which are not charitable.
The point here is simple. Gifts must be given to the church for use by the church and administrated by the church. In this case, Bob and Judy were presented as the recipients of these gifts before any gift was received. If a general plea had been made by the pastor to contribute money to the church’s already approved benevolence fund, and the benevolence team had chosen to use some or all of the contributions to aid Bob and Judy, then the church would be administrating the gift and not the donor. This would have made these gifts charitable.
• What about mission trips? Many churches take one or more short-term mission trips during the year. The rules for charitable giving are different for these events. If the church pays the expenses (purchases plane tickets, pays for hotel rooms, furnishes meals, etc.), and church members participate in the mission trip, then all contributions received by the church for the mission trip are considered charitable. This is true if a person gives money to the church for his or her own mission trip or if another person gives money for a specific individual to go on the mission trip. If a member pays his or her own expenses for the mission trip (purchases his or her own plane ticket, meals, etc.), the church is not allowed to give charitable giving credit to the individual. However, all the expenses that can be justified and documented are fully deductible on an income tax return.
• The gift must be properly substantiated. Nearly every church provides their membership with an annual contribution statement. This is a great practice, and it helps donors stay within the letter of the law. The best practice is to provide the statements for every person who makes charitable contributions to the church. However, it should be noted that the IRS only requires contribution receipts for contributions of $250 or more. Any check written to a church of $249.99 or less can be used as a legitimate receipt in an audit.
Certainly this is not an exhaustive treatment of this topic, but it does address some of the most important considerations related to charitable giving. The financial officer(s) of a church should keep this issue foremost in their thoughts, for it is one the IRS takes most seriously. Churches would do well to heed Paul’s example in 2 Corinthians 8:21 (NIV), “For we are taking pains to do what is right, not only in the eyes of the Lord but also in the eyes of men.”