When Benevolence Gets You into Trouble
By Kristen Alexander
Pastoring is primarily connecting and caring for the people in the church and community, so it should not come as a surprise that Jesus would emphasize this to His disciples. In Matthew 25, Jesus states that those who did or did not feed, clothe, and shelter “the least of these” could be considered to have done or not done these deeds directly to Him.
One of the greatest tools at a church’s disposal is the ability to provide benevolence, equipping the church and community with a safe space to turn to when help is needed. However, it’s critical for churches and ministries to understand benevolence defined by the government, as well as how to implement a compliant benevolence program. Otherwise, ignorance and any misunderstanding about this benefit can land organizations in a world of trouble.
So, let’s take a look at how the government defines benevolence and how you can create a benevolence program the right way, so your ministry doesn’t have to face potential consequences.
Benevolence is defined by the Merriam-Webster dictionary as an act of kindness or a generous gift. Churches use this as a tool to help their members when times get tough, providing them with assistance paying rent and utility bills, or providing them with groceries and gas to get to work. This exemplifies caring for the community in ways that other organizations are not equipped to handle. In doing so, the church and people part of it can become the hands and feet of Jesus.
The IRS defines benevolence as a gift given from “detached and disinterested generosity,” and also out of “charity or like impulses” using a Supreme Court decision under Section 102. Under this current interpretation, the recipient can receive tax-free assistance and not receive a Form 1099-MISC. However, there are also guidelines on who is eligible to receive benevolence.
Income Tax Regulation 1.501(c)(3)-1(d)(2) defines those who qualify for benevolence as “persons who are financially unable to care for themselves as a result of sudden and severe or overwhelming financial burdens arising from events beyond their control are proper objects of charity because they are considered to be ‘distressed.’”
Also, Income Tax Regulation 1.170A-4A(b)(2)(ii)(D) defines "needy" as a “person who lacks the necessities of life, involving physical, mental, or emotional well-being, as a result of poverty or temporary distress.”
Now that we understand who qualifies for benevolence, let’s review who is ineligible.
Treasury Regulation 53.4958-39(b) gives details on who would be considered disqualified persons, also known as insiders. Essentially, anyone that has a substantial amount of influence in the church, along with their family members, cannot receive benefits from the organization. Because of this, board members and their direct family members are ineligible to receive any financial benefits from the church, benevolence included.
When a disqualified person receives benevolence, it is what is known as an excess benefit transaction. An excess benefit transaction happens when a disqualified person, as defined by section 4958, receives any type of financial benefit or assistance that is more than the service that a person provides to the organization.
According to section 4958, disqualified persons may receive compensation for services rendered. This means that they can receive financial compensation that is reasonably based on a service they provide to the church. However, other than compensation for services rendered, disqualified persons may not receive financial assistance, benevolence included, from your church due to their position of considerable control and/or influence within the church.
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When benevolence becomes private inurement
When benevolence is given to insiders or disqualified individuals, it becomes private inurement. Private inurement is when a nonprofit's money is devoted to private uses instead of charitable purposes. This is considered as unacceptable practices for nonprofits, according to the IRS.
There is no prohibition against an exempt charity dealing with its founders, members, or officers in seeing to the conduct of its economic affairs. The IRS expects nonprofits to exist for the public good and not to be created or operated for the personal benefit, financial or otherwise, of an individual. The most common examples of this include unreasonable compensation and personal use of church funds, which the IRS condemns through intermediate sanctions through significant excise taxes.
Private inurement is an absolute term and has no de minimus restrictions. Even if a nonprofit is fulfilling its tax-exempt purpose, it cannot be a tax-exempt organization if it is organized to benefit an individual and under state law can lose its nonprofit status. An example of this would be if a pastor was using his church’s money to pay their child's college tuition, lease a car for his wife, have his living room remodeled, and rent a house in the mountains, while also being permitted to charge almost $60,000 in personal expenses to the church’s credit card. And truly, any one of these activities alone would be considered as private inurement if the pastor is using the church’s money for his own private needs.
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What are the consequences?
When a nonprofit engages in any conduct that results in an improper benefit to an insider, one of three things can happen:
- The IRS can impose monetary sanctions.
- The IRS can revoke the nonprofit’s tax exemption.
The most common punishment for nonprofits guilty of private inurement is monetary sanctions, which is also known as "intermediate sanctions." Revocation of a nonprofit's tax-exempt status is rare, but it does happen, and essentially means a nonprofit would need to close its doors.
Be informed and proactive
Now that you know how benevolence can help your church and community, and who qualifies to receive it, I encourage you to create a benevolence program and stick to it. Creating a benevolence program that details the steps that must be taken to receive financial assistance through benevolence is the first step to ensuring that you are remaining compliant with IRS regulations.
To further assist you in creating a benevolence program, we have created a more detailed and comprehensive resource for churches and ministries. You can click here to learn more about our Secretary’s Suite, which provides you with a step-by-step guide in creating a program that will help your ministry fulfill its mission without being out of compliance.
If you have questions about your church or ministry’s activities, I encourage you to seek out professional advice. Don’t try to figure it out alone.
Consider using StartCHURCH’s Bookkeeping Service to help you manage your ministry’s finances while keeping you in compliance with nonprofit regulations. Give us a call today at 877-494-4655 to learn about all the advantages our bookkeeping service has to offer.