How to Properly Handle Designated Donations

Written by Tyler Phipps on Jan 11, 2019 in IRS Compliance

A church and its members have a unique and valuable relationship. After all, what would a church be without its members? With grace, members receive the teachings of the church’s ministers, and in turn, they offer their support.  

Churches show their appreciation for their donors by sending out contribution statements in time for tax season (usually around January 30). Before you send out contribution statements to your donors, make sure you check out the different rules to follow when handling donation receipts. 

Sometimes, donors wish to fulfill a church’s needs by donating towards a specific project. This is where designated offerings come into play. 

However, these kinds of offerings are not always tax deductible. Instead, designated donations may result in a negative impact on a church if not handled correctly. 

Handling designated offerings

Often, donors simply give to the church and allow the church to determine the best use for the donation. But what if a donor wishes for their contribution to go towards a specific program or event? For example, let's say a donor gives a $500 check towards a church-sponsored missionary. Or maybe the donation is for a building fund, youth ministry, or another project. This type of donation is called a designated donation or advisory donation.

A donation is considered designated or an advisory donation when the donor's funds are intended to go to a specific project, task, or department. 

If a donor gives an advisory donation, but relinquishes control of the donation so that the church determines where the gift will be used, then the donation is considered tax deductible for the member. But if a donor restricts the offering to go towards a specific project without relinquishing control, then that amount cannot be used as a tax deduction by the individual. See IRC § 170(f)(18) and Rev. Ruling 62-113 for more information.

Designated donations can also have a negative impact on a church's benefit. When a donor gives an undesignated gift, the church has no legal obligation to return the gift to the donor, even if requested by the donor. However, with designated donations, churches are liable to return restricted offerings if requested by the donor. 

If the church honors a designated donation or plans to do so in the foreseeable future, then there is no legal obligation to return the funds. However, if the ministry abandons its plans to use the funds towards a designated project, donors can request that their funds be returned.

Keep your designated donations

Here's what a church can do to protect and keep its designated donations:

  • When gathering funds for a specific project, include a statement on your website or offering envelope such as:”By contributing to this project, donors acknowledge that the church has the authority to apply contributions designated for this project to another, related purpose if the project is canceled."
  • Request authorization from a court to transfer designated funds for one project to another. Over 40 states have implemented the Uniform Management of Institutional Funds Act. This Act allows churches to ask a civil court to remove a restriction on designated contributions in some cases. This act has been passed in every state except Pennsylvania.

We’re here for your support

Managing donations and keeping track of their specific details can be overwhelming at times, especially when you're close to sending out donation receipts to your members. 

At StartCHURCH, we understand that sometimes mistakes are made when things get confusing. But don't worrywe're here to help! We can help you stay in compliance with state and IRS regulations, prevent accounting errors, maintain accurate corporate records, and protect your church funds. 

Through our bookkeeping service, churches are paired with a personal bookkeeper that will work closely with your organization. Your bookkeeper will keep track of your church’s finances, offerings, and giving statements, as well as categorize your transactions and reconcile your accounts. As well, you will receive easy-to-read monthly reports. Find out more about how we can serve you and your ministry by giving us a call at 877-494-4655. 

Get Your Ministry’s Finances In Order Today!

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