What are Restricted vs. Designated Offerings?

Written by Chaston Asbury on Apr 20, 2021 in IRS Compliance

3 Minute Read

Congratulations on going through the process of establishing your nonprofit organization! That is no small feat, and we want to celebrate that with you! We also want to make sure that you are operating in compliance with IRS regulations throughout the longevity of your organization. This way, you can be confident your tax-exempt status will not be in jeopardy of being revoked.

When it comes to receiving donations, it is imperative that you understand the distinction between Restricted and Designated donations. Donations given to churches and ministries to be used for a specific purpose fall into one of those two categories.

Continue reading to learn this important distinction and why it is critical that you understand the difference!

Restricted vs. Designated

It is common for churches and ministries to receive donations for building campaigns, outreach programs, benevolence, and other reasons. Whether or not the donor retains control of the funds given determines if that donation is considered a restricted donation or a designated donation.

Restricted donations are donations given where the donor applies conditions for the donation to be used for a specific purpose. Restricted donations are not tax-deductible.

  • Example 1: John and Jane Doe decided to make a $5,000 contribution to a church. However, they specify that the donation must go towards 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 donors' intent 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 with a charitable receipt for the $5,000 donation, it must be clearly marked as "non-tax-deductible."

A caveat to a restricted donation that is tax-deductible is when a church or nonprofit organization launches and advertised a giving campaign for a specific purpose.

  • Example 2: The pastor at First Church announces that the church will raise $10,000 for an orphanage in South America. Over the next two months, the pastor encourages members to give towards the cause, and they raise the $10,000. All of the donations given towards this goal will still be considered tax-deductible because the pastor announced they were going towards a specific purpose.
  • However, what if the church raised the $10,000 but the pastor decides to send $8,000 to the orphanage in South America and use $2,000 for building maintenance? This would be considered a misuse of funds on behalf of the church.

Designated donations are donations given by a donor that relinquishes control over the use of the funds. Designated donations are tax-deductible.

  • An example is when someone uses a church envelope to make a donation designated to a particular 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.
  • The following 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."

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Serious Implications

It is vital that you understand this distinction of restricted vs. designated donations! In August of 2013, a New Jersey appeals court ordered a nonprofit organization to refund $50,000 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))

The same court concluded that when a charity solicits and accepts a gift from a donor, with the understanding 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 initially expressed purpose.

Small things can make a big difference

Everyone, even pastors and ministry leaders, makes mistakes. Often, these mistakes happen simply due to a lack of knowledge or understanding.

We know that nonprofit compliance can be a daunting and challenging subject to understand fully. That's why we have a dedicated team to help you navigate through it!

If you want to approach church compliance with confidence, I encourage you to give us a call today at 877-494-4655 or click the banner to schedule a call below. Our team would be honored to serve you and your ministry!

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Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Blessings,
Raul Rivera


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