Five steps to make sure all funds are going where they belong
In situations like the worldwide pandemic we are currently facing, many are wondering what they can do and how to help. The most practical way for people to help is by donating both cash and non-cash items to organizations providing practical assistance and benevolence to those in need.
The intention and heart of the giver are always appreciated; however, churches and ministries must consider the compliance aspect of receiving these donations. While these offerings are such a blessing for outreach programs and help them to be able to function in communities worldwide, it’s hard to know how to handle them if there are not already procedures in place for designated funds.
For example, if an individual donates a sum of money to your organization and indicates that it is specifically for relief efforts, is that money tax-deductible to the donor? Should it be accounted for separately from regular offerings given by other individuals? And are there any specifics involved in the tracing of this gift?
To answer these questions, let’s review five steps to handle designated donations properly. Implementing these steps will help you avoid misappropriating funds.
What Does Misappropriation Mean?
The legal definition of misappropriation is “the intentional, illegal use of the property or funds of another person for one’s use or other unauthorized purposes, particularly by a public official, a trustee of a trust, an executor or administrator of a person’s estate, or by any person with a responsibility to care for and protect another’s assets.”
Misappropriation can occur when donations are solicited for a specific reason or project and then used for something completely different without informing the donors.
When donors give a response to the church’s request for specific projects and purposes, they are limiting those funds to that purpose. Donors can claim that their donations were misappropriated if the church then uses those donations for other purposes than what was initially presented to them.
This is where many churches and ministries can find themselves in a messy situation. The key here is for you to have a clear understanding of how to handle the donations your church receives.
How to Avoid Misappropriating Funds
There are five invaluable steps that every pastor and ministry leader can follow in regards to designated funds. Those steps are as follows:
1. Understand the difference in designated, restricted, and solicited funds.
Designated donation: when a donor gives, noting the desired intent for his/her contribution. These are donations given with a suggested use from the donor. Designated donations may be claimed as a tax-deductible donation by the donor.
Restricted donation: when a donor gives with a required intent for his/her donation. In other words, a donor requires that his/her contribution must be used for a specific purpose and for that specific purpose only. Restricted donations are not tax-deductible to the donor because the nonprofit does not have control over the use of the funds.
Solicited funds: funds given at the request of an organization, for a specific purpose. Donors of a solicited fund may still receive a tax deduction for this gift because the nonprofit is choosing to restrict how that fund will be used, not the donor.
The best way to handle donations depends upon how you solicit donations and the donors’ intent when they give.
2. Understand what your donor intends.
The key to understanding whether a donation is considered designated or restricted, and therefore tax-deductible or not tax-deductible, is to determine donor intent. The following is an excerpt from IRS PLR-200250029:
“The organization must have control and discretion over the contribution, unfettered by a commitment or understanding that the contribution would benefit a designated individual… The donor’s intent must be to benefit the organization and not the individual recipient.”
In essence, this means that for a donor to claim a tax deduction on a donation given to your church, he must relinquish control, thus giving your church the ability to use the donation at its discretion.
3. Inform your donors of the necessity to relinquish control of their donations to claim a tax deduction.
Informing your donors can be done by adding specific language to your offering envelopes or to your website for when donors give online or at giving kiosks. This wording can be as simple as the following:
“This church is a qualified 501(c)(3) organization. All tithes, offerings, or donations of any kind are deductible under IRC section 170(c)(2). Unless otherwise noted and in accordance with IRS regulation, you agree to relinquish control of the donated funds to the discretion of this church.”
It is also best practice to inform any donor who restricts his donation(s) to a specific use that his donation is considered a restricted donation and is not a tax-deductible contribution.
4. Indicate whether or not a solicited fund may be used for another purpose.
One mistake churches can make is not making donors aware that, when necessary, funds may be directed to other needs of the ministry. When your donors are fully informed and aware of how their donations may be used, a certain bond and trust are built between your church and its donors. This is an invaluable attribute for churches to have.
5. Notify the donor if donations for a solicited fund are no longer needed or the project is closed.
There may come a time when your church receives a donation for a project that has been completed or terminated. What should you do in this instance? In a situation like this, your church has the responsibility of informing the donor that the fund no longer exists and then offering to the donor one of two options.
1. Offer to redirect the donation: The first thing your church needs to do is inform the donor that there is no longer a need for that specific fund or purpose. You should then ask the donor if they would like to redirect their donation to the general fund or another ministry program.
2. Offer to refund the donation: If the donor does not want to redirect the funds, the church is under a legal obligation to offer a refund. Because it is a program that the church set up and asked people to support, the funds received are restricted and can only be used for their intended purpose.
If the donor wants a refund for the donation, the church needs to send the refund with a letter explaining that if the taxpayer claimed a tax deduction on his tax return, he may need to amend the tax return using Form 1040X.
Protect Your Ministry
By implementing what you learned from the five steps mentioned above, you will be holding your church to a high standard of financial integrity and stewardship that can only benefit both your church and your donors in a positive manner. Furthermore, the implementation of these lessons can help prevent your donors from feeling as if their intent is being sidelined for a different cause.
First published on StartChurch.com. Used by permission.