The question is really whether you can make a tax-deductible contribution if you designate how you want your donation used. This is a good question and one that we will address as part of our series on tax guidance for churches and religious organizations.
The question is really whether you can make a tax-deductible contribution if you designate how you want your donation used. This is a good question and one that we will address as part of our series on tax guidance for churches and religious organizations.
A designated contribution is one where contributions are made for a specified purpose or on behalf of a specified individual.
Churches qualify for exemption from federal income tax under section 501(c)(3) of the Internal Revenue Code. However, churches, and other 501c3 organizations, are required to meet certain criteria including that the church must be organized and operated exclusively for religious or other charitable purposes. Typically, when someone donates to a qualified exempt organization, their contribution is also considered tax deductible if certain conditions are met.
There are two issues with designated contributions. The first issue is whether the donation is being designated for a use that is in line with the church’s tax-exempt purpose. The second issue is whether, in accepting the donation, the church still has full control over how the donation will be used and isn’t simply acting as a conduit for sending funds to a project or individual that wouldn’t otherwise be treated as a deductible contribution.
If a designated contribution is for an approved project or program of the church, the contribution will be tax deductible. For example, if the church has a building fund and a member wants to contribute specifically toward the fund that is a tax-deductible contribution.
However, if a donor wants to designate their contribution to be used for a specified individual this usually is not treated as a tax-exempt contribution. The issue is that the donation isn’t being given for the benefit of the church or in furtherance of the church’s tax-exempt purpose, but for the benefit of an individual.
Churches should be careful in only accepting contributions that are in furtherance of their tax-exempt purpose. If a church receives a donation that designates that funds are to be used in a manner that is outside of the purpose and mission of the church, it should not accept the funds.
One way for churches to be able to help members contribute to those with financial needs is by establishing a special fund, such as a benevolence for that purpose. Through this arrangement contributions can be directed to the fund and the church can make sure the funds are being used to help those with financial needs either in the congregation or in the community.
Jennifer Gray Woods is the lawyer for the Lake Union Conference, as well as the Public Affairs and Religious Liberty director.
