How to Handle Designated Donations Given to Your Ministry
Churches and ministries often receive designated funds for building campaigns, outreach programs, or benevolence. While these offerings are indeed a blessing, you may be surprised to hear that a large number of churches and ministries have difficulty knowing how to properly handle designated contributions.
I think the primary reason for this problem is that many churches and ministries have not adopted and implemented a proper procedure for handling designated funds.
So, are there consequences if a church or ministry misuses or mishandles designated contributions? In short, the answer is yes*, but this is only if certain types of designated donations are mishandled.
Let me explain.
Why a church may unintentionally mishandle donations
Improper handling of designated funds can lead to misappropriation or embezzlement of church funds. When a church or ministry mishandles a designated offering it is usually done unintentionally. This is because there are two types of designated offerings. I refer to them as designated and restricted donations.
This is a “hot topic” we discuss at our conferences, and the difference between designated and restricted offerings is thoroughly addressed in a previous blog post.
(Recommended reading: “Restricted Offering vs. Designated Offering”)
Later in this post I will briefly explain the difference between restricted and designated offerings when discussing how to properly handle designated donations. First, we need to understand the potential consequences for not knowing how to properly handle designated donations.
With that being said, let us take a look at what is misappropriation.
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What is misappropriation?
The legal definition of misappropriation is “the intentional, illegal use of the property or funds of another person for one's own use or other unauthorized purpose, particularly by a public official, a trustee of a trust, an executor or administrator of a dead 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 and then used for a completely different reason without informing the donors.
A church will typically find itself in a messy situation when a restricted donation is used for other purposes than what was initially intended by the donor. The key here is for you to have a clear understanding about handling the donations your church receives.
5 ways to handle designated donations and avoid misappropriating church funds
Below are 5 ways that will help you know how to properly handle designated donations while also avoiding the misappropriation of church funds.
#1: Know the difference between designated and restricted donations.
- Designated donation: when a donor gives and notes a desired intent for his/her donation. 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 donation 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.
The best way to handle donations depends upon how you solicit the donations and the donor’s intent when giving.
#2: Understand the donor’s intent.
The key in understanding whether a donation is considered designated or restricted, and therefore tax-deductible or not tax-deductible, is to determine the donor’s 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. Rev. Rul. 62-113. The donor’s intent must be to benefit the organization and not the individual recipient. Rev. Rul. 68-484.”
In essence, this means that in order for a donor to claim a tax deduction on a donation given to your church, he/she must relinquish control and give your church the ability to use the donation at its discretion.
For donations to be tax-deductible, donors must relinquish control.
#3: Inform your donors of the necessity to relinquish control of their donations in order to claim a tax deduction.
This can be done by adding certain 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 a donor who restricts a donation to a specific use that his/her donation is considered a restricted donation and is not a tax-deductible contribution.
#4: Clearly indicate whether or not a designated fund may be used for another purpose.
An easy mistake for churches and ministries to make is by not informing donors when their restricted donations 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 is built between your church and its donors. This is an invaluable attribute for churches.
#5: If donations for a specific fund are no longer needed or the project is closed, notify the donor.
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 offer to the donor one of two options.
- 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 if the donor would like to redirect his/her donation to the general fund or to another ministry program.
- 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 financially support. These funds are restricted and can only be used for their intended purpose.
If the donor wants a refund for a donation, it is important for the church to send the refund with a letter explaining that if the donor claimed a tax deduction, then he/she may need to amend his/her tax return using Form 1040X.
Simple steps that can protect your ministry
By implementing what you learned from this article, you will be holding your church to a high standard of financial integrity and stewardship that can only benefit both your church and donors in a positive manner. Furthermore, the implementation of these lessons can help prevent the type of situation that many churches and ministries find themselves in today.
At StartCHURCH, one of our goals is to provide pastors and church leaders, just like you, with the necessary tools and resources needed to lead their churches in the world of church and ministry compliance.
We would love for you to join us at one of our conferences for a day of learning, growing, and impartation.
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Handpicked articles for you:
- “Tither Denied Deduction Because Church was not 501(c)(3)”
- “3 Positions Every Church Board Must Fill”
- “What Every Pastor Must Know About Publishing a Book”
*(Schmidt v. Catholic Diocese, 18 So. 3d 814 (Miss. 2009))