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Make sure your donors’ charitable gifts qualify as tax deductions

As individuals begin to finalize their year-end giving, it is important to consider the deductibility of contributions. According to IRS Publication 526, Charitable Contributions, deductible contributions must be made to a qualifying organization.  Qualified organizations include nonprofits, churches, synagogues, temples, and mosques.  Gifts to a nonqualified organization or individual are not tax deductible.  Let’s discuss three examples of gifts.

Staff and Clergy Year-end Gifts

Donors may want to give a gift to staff and clergy at year-end as a token of their appreciation. To ensure deductibility for donors, one method is to include year-end gifts to staff and clergy as a budget item.  Using this method permits the church to determine amounts to give each person and allows the donor to deduct the gift as being given to a qualified organization. Giving to a specific individual is not allowed if the donor wants to receive a tax deduction.

The budgeted item may be funded from general gifts or a special offering.  If the funding comes from a special offering identified for year-end gifts to staff and clergy, the church should treat this as a restricted contribution.  Any funds from the special offering that are not distributed by the end of the year should be included with restricted net assets.

Disaster Relief

With all the news of natural disasters, many organizations are participating in providing disaster relief.  Like the year-end gifts, donors can deduct gifts only if they are made to a qualifying organization and not earmarked for the benefit of a specific individual or family.

One way the church may participate is through a partnership with a qualified charitable organization.  In this case, funds collected should be recorded as a liability titled “Funds Held for Others” until passed along to a partner organization. There is no effect on the income statement this way.

Benevolence Funds

In compliance with the IRS rules, the church cannot accept contributions for specific individuals or families. The church should only accept contributions to the church’s benevolence fund that are not specifically earmarked for a specific individual or family.  A best practice is to have a benevolence policy.  The policy may permit suggestions of families or persons in need, but ultimately the benevolence committee should have the final approval on who would receive assistance and how much assistance they would receive.

IRS requires the following documentation when the benevolence committee provides assistance to individuals or families:

  • A complete description of the assistance
  • The purpose for which the assistance was given
  • The organization’s objective criteria for disbursing assistance under each program
  • How the recipients were selected
  • The name, address, and amount distributed to each recipient
  • Any relationship between a recipient and officers, directors, or key employees or substantial contributors to the charitable organization.

Addressing these items in advance is ideal as this allows for intentional consideration of all relevant factors.

Questions? Please contact Melodi Bunting


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