Restricted Offering vs. Designated Offering
Oftentimes, churches and ministries receive “restricted offerings” for building campaigns, outreach programs, or benevolence. There are other instances when churches receive “designated offerings.”
You may be surprised to hear that a large number of churches have trouble distinguishing the difference between the two offerings. The main reason for this problem is that many individuals do not know that in order to receive a tax deduction the law requires a donor to relinquish control of an offering or donation given to a church.
Therefore, it is important to know the difference between a restricted offering and a designated offering. 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 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))
A large number of churches have trouble distinguishing the difference between restricted offerings and designated offerings.
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.
(Recommended reading: “5 Important Lessons on Handling 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 1: John and Jane Doe decide to make a $50,000.00 contribution to a church. However, they want the donation to 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.”
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Another type of restricted offering is when a church leader launches a giving campaign for a specific purpose (i.e. a new building). If a person gives an offering specifically to the new building campaign, the church leader is bound to use the donation solely for the purpose of that campaign. Below is an example.
Example 2: The pastor at First Church announces that the church is going to raise $10,000 for an orphanage in South America. Each Sunday over the next two months, the pastor encourages members to give towards the cause. Many special offerings are received for the orphanage. At the end of the two months, the pastor has collected a total of $7,800.00. However, because the church had been financially struggling, the pastor directs the treasurer to send $6,000.00 to the orphanage and to apply the remaining $1,800.00 to desperately needed pastoral salaries.
This is a classic case of misuse of restricted offerings because the pastor announced to the congregation that the special offerings were for a specific purpose (the orphanage). The use is restricted for these offerings because they were collected for one specific reason. The church pastor does not have the liberty to use the funds as he wishes.
This type of misuse of funds also occurs with love offerings. The church leader announces that a love offering will be taken up in the church for a guest speaker. The leader does not mention that the speaker will receive only a portion of the collected amount. The congregation members are under the impression that 100% of the offering is going to be provided to the speaker. After the love offering is collected, the church gives only a part of it to the guest speaker.
The church leader is not permitted to tell a congregation that a love offering collected will be given to a guest speaker, but then later withhold a portion of it for the church. This form of behavior undermines the members’ ability to trust their leadership in the area of handling church finances.
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 the church is not required to use it solely for the designation.
(Recommended reading: "How to Handle Year-End Donations, Part 1")
An example 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 the 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 church 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 man.
If you want to learn more about topics and strategies pertaining to church compliance, then I encourage you to click on the link below and register for one of our conferences near you!
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