The end of a calendar year is usually a time of generosity. Donors may share part of their corporate bonuses or choose to give more for tax advantages. For churches, the boost of giving at year's end can be a windfall and a blessing. But end-of-year contributions are not always gleaming treasures. The gift that looks like a brightly wrapped present can actually be a lump of sooty coal carelessly stuffed into a stocking. To keep your blessings from turning into curses, you'll need to know which mistakes to avoid, and how to follow a set of best practices.
In the majority of cases, year-end giving comes in the form of cash and checks. But if many congregation members receive stock options, stock awards, or stock vesting at the end of the year, you can also expect stocks and securities in the offering, says Frank Sommerville, a Texas attorney specializing in non-profit law. Donations of real estate, vehicles, equipment, and jewelry are not so common at year's end, notes Dan Busby, acting president of the Evangelical Council for Financial Accountability (ECFA).
A church can choose to receive anything a donor wishes to give, including real estate, vehicles, equipment, art, jewelry, frequent flyer miles, and timeshares. Whatever form the gift takes, a very important key in "year-end gifts" is the qualifier—;"year-end."
The Difference A Day Makes
The biggest snare a church can step into is failing to keep an unmistakable dividing line between the old year and the new year. The IRS allows individuals t o deduct from their income charitable donations in the year the donations were delivered. Gifts delivered in person can be easily received and recorded on the same day. When a donation is mailed, the situation can get complicated, since donations delivered at the end of a year often are not received by the church until the new year.
When receipting mailed gifts, nearly all charities use the postmark date as conclusive evidence of when the donation was mailed. If the donor mailed the donation in the old year, but too late for the last mail pickup, keep in mind that the individual, not the charity, bears the burden of proving when the donation was delivered.
Jim Grubb, pastor of administration and finance at Bethany Bible Church in Phoenix, allows no wiggle room on this issue. "We will identify the postmark dates on all envelopes that come into the office during the first part of January and we'll keep those envelopes," he says. "This helps us deal with a donor who may say 'I gave this at such a date.' And we can say, 'We have to comply with the postmark.'"
The same principle applies to the gifts of stock and securities, says Emily VerSteeg, church administrator at Crossroads Fellowship in Raleigh, North Carolina. The stocks and bonds to be donated must actually be in the hands of the church in the old calendar year, whether the certificates are hand delivered or electronically transferred.
At times, donors will ask churches to keep their books open a few days into the new year so they can still receive the tax benefit from a donation made in the prior year. Churches should strongly resist this temptation.
"You will always get somebody who will come in after the first of January and say, 'I really meant to do this last year. Would you record this in the prior year?'" says Grubb. "Sometimes they are very powerful and influential people. But you have to be able, with integrity, to deal with everyone on an equal basis."
Churches can help their donors get ready to make their year-end gifts by providing timely information. Phyllis Olsen, financial administrative assistant at Grace Chapel in Englewood, Colorado, makes sure the proper information about IRS reporting requirements is included in each December church bulletin.
"This helps donors make sure that a gift intended for the current year will get to us in time to qualify as a current-year donation," she says. "The notice makes it clear that we are not free to use the check date alone to determine the date of the gift."
The end of a year can spur gifts designated for specific uses. In general, contributions must be under the control of the church in order to be tax-deductible for the donor. Still, if a church accepts a donation for a specific purpose, it may be bound to honor that purpose, even if it ends up not serving the church's needs.
But a gift designated for a certain person (often the pastor) is viewed by the IRS as a "pass-through" gift and is definitely not deductible for the donor, since it is earmarked for an individual person. For more information on this complex subject, see the resources listed at the end of this article.
One donor approached a southern California church with an offer to donate $10,000 to the church if the church would then write a check for $9,000 to an orphanage in Mexico. The church would keep the other $1,000 as a "processing fee."
In addition to being a pass-through gift, Busby says this particular gift creates a concern because it is earmarked for a foreign charity. Gifts to foreign charities do not provide a tax deduction. "That's why the donor wanted to run the gift through a U.S. charity—;to get the tax deduction," he says. "But the church had no relationship with the orphanage, so they turned the gift down."
Churches should receive and record gifts of real property without attempting to appraise their value. "Valuation of a non-cash gift is the responsibility of the donor and not the church," says Busby. "When a donor asks the church to value a non-cash gift, this really places the church in a bind to represent itself as an expert appraiser. It's best for a church not to get into the evaluation business."
Churches are not obligated to accept every gift offered to them, even though there may be special pressure to receive questionable or otherwise undesirable contributions. These pressures should be resisted if the gift cannot meet two criteria: the gift is not more trouble than it's worth; and the gift fits the overall mission of the church. "You cannot allow the end of the year to pressure you into making a huge mistake," says Sommerville.
Cash donations should be counted, recorded, and signed for by two individuals.
Make sure the donation is credited to the proper year. Check your mail for a week or so after New Year's Day for any checks dated December 31 or before. If you find any, save the envelopes. Marketable securities must be transferred directly into the church's account before January 1 to be recorded as received in the previous year. The controlling date is when the securities are added to the church's account, not the date when the donor instructed the stockbroker or selling agent to transfer the certificates to the church.
Sell any donated marketable securities immediately. "Otherwise, the church puts itself in the position of being an expert in stock evaluation," says Busby. "It will be playing the market. It's best just to dispose of it." However, he says that a church may want to hang onto privately held stock in an effort to build value.
At Bethany Bible Church, Grubb has taken the church out of the business of receiving stocks and securities by setting up an account with a broker. "We let the donor know what account their broker should transfer it to. Then, our broker has a standing order to liquidate the stock immediately," he says.
Record every donation (regardless of type—;cash or non-cash) in an integrated accounting system. Some churches do not want to record non-cash gifts in their donor management system so that their cash control accounts agree with the amount of cash received. In this case, non-cash gifts must be recorded in a non-cash revenue account.
Provide records to donors of every kind of contribution. All churches should send at least a year-end statement to help donors keep accurate tax records. Give donors a receipt for any currency donation regardless of amount, and a qualifying receipt for all gifts of $250 or more. A qualifying receipt includes the name and address of the church, the dates and amounts for each donation, and a statement that no goods or services were provided in exchange for the donation except general intangible religious benefits.
Acknowledge tangible property gifts with a letter to the donor listing the donated items and the dates they were received. Remind donors that they should assign a value to the items—;the church will not do so. Enclose a copy of IRS form 8283 to help the donor properly record the gift for tax purposes. This form must be filled out if the donor values the gifts at more than $500 for that year. If the gift is an automobile, motorcycle, boat, or other means of transportation, the donor should be sent an IRS form 1098 C. The donor must obtain a professional appraisal for most non-cash gifts valued at $5,000 or more.
Make sure your receipts state that no goods or services (other than general, intangible religious benefits) have been given by the church in exchange for the receipt of the donation. "Churches have been doing a good job on this for donations of cash, but not on receipts for non-cash gifts," says Busby. "So the IRS tends to deny the deduction when this wording is not on the receipt. It's really embarrassing for a church to provide a gift acknowledgement and then have the donor find out they've lost the deduction because of inappropriate wording of the receipt."
Make sure the receipt is properly attributed. What if a business owner makes a donation to the church on a company check, and then asks the church to provide a personal charitable gift receipt? This sleight-of-hand is attempted so the donor can claim a larger deduction than he or she is entitled to. "Or an elderly grandmother in a lower tax bracket will ask the receipt to be made out to a grandson in a higher bracket," says Busby. "The tax law isn't as clear as we'd like in this area, but this is where churches need to step up with integrity." Therefore, churches should issue the contribution receipt to the name that appears on the check, whether corporate or individual.
A Moving Target
Regulations about receiving year-end contributions are never etched in stone. Savvy church treasurers and administrators monitor changes in the laws, or have access to people and organizations that are knowledgeable about the situation. Start by reading IRS publications. Then consult denominational headquarters and make use of annual publications such as the Church and Clergy Tax Guide by Richard Hammar or the Zondervan Church and Nonprofit Tax and Financial Guide by Busby.
"A lot of treasurers are volunteers who … end up doing the same thing the person before them did because that's the way it's always been done," says Grubb. "But the situation does change—;it's essential to stay on top of things."
The Internal Revenue Service website: irs.gov/charities/churches
The Evangelical Council for Financial Accountability: ecfa.org
Your denominational headquarters
The Zondervan Church and Nonprofit Tax and Financial Guide by Dan Busby
The annual Church and Clergy Tax Guide, available at ChurchLawAndTaxStore.com