The Difference Between Restricted & Designated Offerings

By Raul Rivera

It is common for churches and ministries to receive donations for building campaigns, outreach programs, benevolence, and other reasons. These types of specified donations are referred to as “restricted offerings.” There are other instances when churches receive donations referred to as “designated offerings.” 

Many churches have trouble distinguishing the difference between the two offerings, which can get them into serious legal trouble. The reason for this is because many donors and nonprofit leaders do not know that in order to receive a tax deduction, the law requires a donor to relinquish control of an offering or donation given to a church. 

Therefore, it is critical to understand the difference between a restricted offering and a designated offering. Before we examine the difference, let’s look at a court case in which one nonprofit organization paid the price for not fully understanding the difference.

Nonprofit ordered to refund $50k

In August 2013, a New Jersey appeals court ordered a nonprofit organization to refund $50,000 to a couple who donated a restricted offering. 

The court noted that ordering the nonprofit to refund the couple was the most lenient sanction against the nonprofit from a menu that included "breach of fiduciary duty and civil fraud." (Adler v. SAVE, 432 N.J. Super. 101, 74 A.3d 41 (Super. Ct. App. Div. 2013))

The same court concluded that when a charity solicits and accepts a gift from a donor, with the understanding that the donor's expressed purpose for making the gift is to fund a particular program, the charity is bound to return the gift when it unilaterally decides not to honor the donor's originally expressed purpose. 

If you are still not entirely sure why it matters, that is okay. Let’s look at the definition of restricted offerings.

(Recommended reading: “3 Tips on Preparing Contribution Receipts for 2020")

Understanding restricted offerings

A restricted offering is any offering or donation in which the giver retains control over how it is used. Here is an example. 

Example 1: John and Jane Doe decide to make a $50,000 contribution to a church. However, they want the donation to be used for improvements to the children's facilities. Even though the church does not have a special fund for the children's facilities, the church leader acknowledges the intent of the donors and accepts the donation. 

Under the law, the church leader is required to use the money solely as intended by the givers. Additionally, when the church leader provides the donors with a giving receipt for the $50,000 donation, it must be clearly marked as “non-tax-deductible.”

Another type of restricted offering is when a church leader launches a giving campaign for a specific purpose (i.e., a new building). If a person gives an offering specifically to the new building campaign, the church leader is bound to use the donation solely for the purpose of that campaign.  

There is a caveat to this type of restricted offering. Since it is solicited by the church, it is still considered tax-deductible to the donor. It would still be restricted to the purpose it was solicited for but is considered tax-deductible to its donors. Below is an example. 

Example 2: The pastor at First Church announces that the church is going to raise $10,000 for an orphanage in South America. Over the next two months, the pastor encourages members to give towards the cause. Many special offerings are received for the orphanage. At the end of the two months, the pastor collects a total of $7,800. However, his church has been struggling financially. So, the pastor directs the treasurer to send $6,000 to the orphanage and to apply the remaining $1,800 to desperately needed pastoral salaries. 

This is a classic case of misuse of restricted offerings. Why? Because the pastor announced to the congregation that the special offerings were for a specific purpose (the orphanage). The use is restricted for these offerings because they were collected for one specific reason. The church pastor does not have the liberty to use the funds as he wishes. 

This type of misuse of funds also occurs with love offerings. Let’s say a church leader announces that a love offering will be taken up in the church for a guest speaker. The leader does not mention that the speaker will receive only a portion of the collected amount. But the congregation members are under the impression that 100% of the offering is going to be given to the speaker. After the love offering is collected, the church gives only a part of it to the guest speaker. 

The church leader is not permitted to tell a congregation that a love offering collected will be given to a guest speaker, but then later withhold a portion of it for the church. This form of behavior undermines the members’ ability to trust their leadership in the area of handling church finances.

Understanding designated offerings

A designated offering is any type of offering or donation that is given to the church in which the donor designates the offering for a particular purpose, but the church is not required to use it solely for the designation. 

An example is when someone uses a church envelope to make a donation that is designated to a certain program. If the church envelope contains specific language (see example below), it makes the designation a suggestion and allows the church to retain control, thus making the donor's contribution tax-deductible. 

Below is sample language you can use on your church envelopes. 

This church is a qualified section 501(c)(3) organization. All tithes, offerings, or donations of any kind are tax-deductible under section 170(c)(2). Using this envelope constitutes your agreement to relinquish control in accordance with IRS regulation.

Let us look at an example to further our understanding. 

Example: Jim Steward issues a check for a $1,000 donation. He writes on the check memo and the church envelope that he wishes for it to be used to buy the church a new computer. After receiving the offering, Pastor Larry notices that the church has a bigger need. The rent for the church was due two days ago, and the $1,000 check is needed to pay it. He instructs his treasurer to pay the rent using Jim’s donation. 

In this example, Pastor Larry did nothing wrong. He acted in the best interest of the church. Jim Steward, the giver, receives a tax deduction because he did not apply any conditions to his contribution to the church. 

Under current IRS regulations, Pastor Larry has the right to use the $1,000 check in any way he sees fit, so long as it is an honest effort to further the purposes of the church. Pastor Larry acted correctly because it is very important to the well being of the church that the rent is paid.

Mistakes made for lack of knowledge

I do not think a week goes by in which our team at StartCHURCH does not have a conversation with a pastor or church leader who admits that he or she has made mistakes (both small and large) because of a lack of knowledge. 

It does not have to be that way for you. Make it a priority for you and your church to come into full compliance with the laws of God and man. 

If you want to learn more about topics and strategies pertaining to church compliance, I encourage you to give us a call today at 877-494-4655 or schedule a call below. Ask us about how our Bookkeeping Service can provide you with the personal assistance and tools you need to make sure your financial books are in order, as well as in compliance. 

Our team would be honored to serve you and your ministry! 

---