Love Offerings--When They Are Taxable and When They Are Not

Written by Raul Rivera on Jun 23, 2011 in IRS Compliance

The dialogue that surrounds the taxability of love offerings is similar to a pendulum swinging from one extreme to the other. There are some that believe all love offerings are tax free, others that believe a love offering can never be tax free, and a whole group of folks that have no idea. 

There really is a lot of confusion over this topic - to the degree that pastors from both large and small churches have been prosecuted and convicted of tax evasion over unreported love offerings. It definitely matters that every church and pastor knows when a love offering is taxable and when it is not.

Let me detail for you some scenarios of when it is taxable and when it is not, and hopefully it will help bring some clarity to your ministry. 

Why the confusion?

The confusion comes primarily because the term love offering implies a gift that is given because of love and respect for the recipient. In the giver's mind it may be a gift, while in the IRS's mind it is compensation. Herein lies the conflict.

Section 102(a) says, "Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance."  While the members of the church are truly giving a love offering as a gift, the IRS says it is taxable income because section 102(c)(1) says that "any amount transferred by or for an employer to, or for the benefit of, an employee" shall be treated as gross income.

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So while the law clearly says that a gift is tax free, the very fact that the gift is given to the church and then in turn given to the pastor or leader makes it 100% taxable because of section 102(c)(1). The law does make an exception for a gift given by the church to the pastor if it is under $25.00.

4 common questions surrounding love offerings

1. What if the church collects the offering but the members make the checks payable directly to the pastor?

There are many who have suggested a scenario in which the church takes up an offering for the pastor and they encourage the members to either give in cash or make the checks payable directly to the pastor so that it never goes though the church. I spoke to a church administrator whose accountant suggested this idea as a way for the pastor to be fully blessed by the love offering.

(Recommended reading: "Love Offerings Directly to Pastor Spell IRS Trouble")  

While this may sound like a good idea, the love offering is still subject to section 102(c). The very fact that the love offering was organized and controlled by the church (employer) makes it taxable; it is no different to an IRS agent whether the checks were made payable to the church or directly to the pastor. 

What is more, the possibility exists that the IRS could interpret the act as an attempt to defeat or evade a tax, if by having checks made directly to the pastor it appears the church is trying to keep the offering "off the books". The United States Supreme Court ruled that section 7201 refers to the willful attempt to evade or defeat the assessment of a tax by preventing the government from knowing a person's true tax liability. Sansone v. United States, 380 U.S. 343, 354 (1965). Please see the court case below Charles E Banks and Rose M Banks v. Commissioner.

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2. What if a member randomly gives the pastor a love offering after service?

The possibility of an individual approaching the pastor and handing him/her a check or cash as a gift is realistic. In fact, it happens every Sunday to pastors all across America. 

What pastors want to know is if the love offering is taxable or considered by the IRS to be a gift.

The waters may appear to be crystal clear that they are tax free gifts, but in fact they are murky. Section 61(a) defines gross income as ". . . all income from whatever source derived . . ." Section 61(a)(1) expounds by including "compensation for services." Because of this definition of gross income, we have to look at the context surrounding the reason for which the church member personally gave the pastor the love offering.

In a situation such as one described here, a church member has just finished attending a service in which he/she received some intangible religious service administered by the pastor. The typical pastor usually thanks the church member for the wonderful blessing and then pockets the gift without ever reporting it.  While there is no published guidance by the IRS, in the case, Commissioner v. Duberstein, (1960), the U.S. Supreme Court stated that "the mere absence of a legal or moral obligation to make such a payment does not establish that it is a gift . . . conversely, where the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it . . .what controls is the intention with which payment, however voluntary, has been made."

In this scenario it is easy to surmise that the motivation for the love offering was the services that the minister rendered in the worship service.

(Recommended reading: "The Pastor's Discretionary Fund") 

3. What if several church members get together on their own accord, decide to gather funds together, and present those funds to the pastor?

There are times when church members get together and collect money so that they may bless their pastor. The strategy is that if it is not a church sanctioned activity and not mentioned from the pulpit, but done outside the church, then it constitutes a tax-free gift to the pastor. In Charles E Banks and Rose M Banks v. Commissioner, T.C. Memo. 1991-641, the members of the church met amongst themselves to discuss the gifts to be given to the pastor. The court ruled that the church members' desire to reward their pastor for her past services constituted compensation and had to be included in gross income.

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4. What about love offerings to a retired pastor, or one about to retire?

In the IRS' Minister Audit Technique Guide "there are numerous court cases that ruled the organized authorization of funds to be paid to a retired minister at or near the time of retirement were gifts and not compensation for past services." IRS Revenue Ruling 55-422 states that those types of payments are gifts and not compensation.  This is a unique tax benefit that ministers enjoy.  In essence, the requirements that keep this type of love offering tax free are as follows:

  1. The payment was not made in accordance with any enforceable agreement, or past practice.
  2. The pastor will no longer be rendering services to the church.
  3. The recipient's relationship to the organization was greater than mere employment; senior pastors, founders, etc. have a deeper relationship with the church than regular staff or other hired pastors.
  4. The recipient had been adequately compensated for his past service. These love offerings cannot be reminiscent of or connected to his early years of uncompensated, sacrificial labor.  It is very important that a church carefully calculate its words when presenting this from the pulpit.

(Recommended reading: "4 Reasons Why Ministers Should Opt-Out of Social Security")

As you can see, love offerings come in many ways.

The key in determining whether love offerings are taxable is knowing the context in which the offering was given.

If you follow this guide, you will not go wrong.

The golden rule of love offerings

No one enjoys paying taxes, but the fact is they are here to stay. We enjoy our roads, sidewalks and schools. They are paid for by tax dollars. Moreover, Scripture commands that we obey the laws of our land. When it comes to those offerings that are given by church members after services, it is very easy to slip it in your pocket and forget about it. While it may nearly impossible for the IRS to know, the Father above sees it all. 

So here is the golden rule: if a church member ever loves you by giving you a love offering, share the love with the IRS and all will go well with you. As Jesus said, "Give back to Caesar what is Caesar's and to God what is God's." (Mark 12:17)

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Blessings,
Raul Rivera


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