Establishing a Scholarship Fund for Graduating Seniors

Investing in the Lives of Young Adults

In what significant way could your church impact the life of a young man or woman who is graduating from high school-a way that would help solidify the future he or she aspires to have? In 2002, our church in Florida began a scholarship program in order to do that very thing-to help some of the graduating seniors with college tuition or books so that they might be better positioned for success.  One student in particular stayed on the program for four consecutive years, graduated from college, and still to this day is actively involved in leadership at the church. We are so proud of him today and how the Lord works in his life!  
Maybe you are thinking you want to start a scholarship fund.  That is a great idea, but the question is: how? Is there any special paperwork that needs to be done with the IRS?  How about a scholarship that is for over $600.00?  Does the church issue a form 1099-Misc?  Did you know that many churches do scholarship programs each summer and not realize that they are violating many charitable regulations that could jeopardize exempt status?  Let me share five of the most important steps for setting up a scholarship program. 

Five Important Steps in Setting Up a Scholarship Program

  1. Create a written program that describes the type of scholarships the church will award.  Will they be only for Christian college attendance, or for any accredited college?  Make sure you also list the maximum dollar amounts you issue each year, semester and whether recipients can receive a scholarship each year if they maintain a certain GPA.  This should fit in two pages or less.
  2. Make at least one public announcement. One of the biggest shortfalls of church and ministry scholarship programs is failure to announce them. This is a requirement.
  3. Present the written program in a board meeting and get it approved.  It is necessary that the program be board approved and that at least three individuals be appointed to serve on a selection committee.  I know that some people hate committees, but in this case it is a good thing.  It helps to prove that the church is objective in selecting recipients.
  4. Keep a case history of recipients for at least three years and show how they were selected.  To do this, you will need to create an application that asks questions necessary to help you select students who meet the criteria of the program.  If any applicants or recipients are related to any individuals on the committee or the board of directors, please be very certain that you implement a written procedure to ensure objectivity.
  5. Require that the individual recipients sign an annual statement showing that funds were used towards books or tuition (This is a form that the church prepares).

Scholarship and Taxes

Under the law, if a student receives a scholarship and it is not used to pay for books or tuition, it becomes taxable income to the student.  If the scholarship is for more than $600.00 and it does not get used to pay for their schooling, then the church has to issue form 1099-Misc. to the student.

What the IRS Has to Say About Scholarship Programs

While a scholarship program may be a wonderful way to invest in the lives of the young men and women of your church, do not let it become a stumbling block by violating the five simple steps above.  The amendment of the regulation of section 7611 was approved in February this year and the IRS will once again begin church audits.  When the IRS begins church audits this fall, it will be with renewed vigor.  Be ready by ensuring that you maintain good, clear and adequate records.

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