Are All Church Donations Tax-Deductible?

By Raul Rivera

It’s no secret that your church relies on the donations received from church members and generous donors. 

Churches and ministries often receive offerings for building campaigns, outreach programs, or benevolence needs. As a result, donors are able to write off their donations as tax deductions. But are there instances when a donor’s gift is not tax-deductible?

Many pastors and ministry leaders are often surprised when they learn that not all types of donations are “created equal.” As a pastor and ministry leader it is important that you know the difference between when a restricted offering and a designated offering is given to your church or ministry.

Before we examine this difference, let us look at a case where one nonprofit organization paid an expensive cost for not fully understanding the difference between a restricted and designated offering.

New Jersey nonprofit ordered to refund $50k

In August of 2013, a New Jersey appeals court ordered a nonprofit organization to refund $50,000.00 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, knowing 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.

Understanding restricted donations vs. designated donations

Restricted donations

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

Example:

John and Jane Doe decide to make a $50,000.00 contribution to a church. However, they state that the donation should only 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 a giving receipt for the $50k donation, it must be clearly marked as “non tax-deductible.”

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 where the donor ultimately relinquishes control of the donation.

In this case, the church is not required to use the donation solely for the designation. 

An example of a designated donation 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 $1,000.00 donation, and 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 2 days ago, and the $1,000.00 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 $1,000.00 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 a lack of knowledge

Not a week passes by that we do not have a conversation with a pastor or ministry leader who admits that he/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 of man. 

If you need help with the tracking, reporting, and managing of the donations your church receives, try our easy-to-use cloud software technology, Kingdom Steward.

In addition, Kingdom Steward helps you to generate financial reports and manage building pledges, all while being intuitive for any church to use, no matter the size.

If you’d like more information about Kingdom Steward, give us a call today at 877-494-4655 or click on the link below.

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