Short-term mission trips serve a valuable role in fulfilling the Great Commission. Some churches, however, fail to properly plan for the numerous administrative and accounting hurdles that must be cleared in order to meet the requirements of the U.S. Department of the Treasury and to protect donors, participants, and the sending church from potential negative tax consequences. In this article, we’ll look at fundraising for mission trips and how to properly track expenditures for maximum tax benefits.
Getting the biggest tax bang for your buck
In most instances, participants have to provide the funds to pay for their portion of the mission trip expenses. Generally they accomplish this in three ways:
- Direct payment by the participant;
- Solicitation of donations from friends and family; and/or
- Participation in various church-sponsored fundraising activities.
- participant expenses
- Mission trips, when structured correctly, are generally classified as “charitable travel.” Expenses incurred in charitable travel are expenses paid by a volunteer in order to allow the exempt organization to fulfill its exempt purposes. Expenses incidental to the rendering of volunteer services to a charitable organization may constitute a deductible contribution by the volunteer. Treas. Reg. Section 1.170A-1(g).
- Allowable volunteer expense deductions include transportation expenses and reasonable expenses for meals and lodging necessarily incurred while away from home. Therefore, in the event a participant pays his or her own trip expenses, either directly or to the church, he or she is entitled to claim a charitable contribution for the expenses paid. If the participant pays the expenses directly, then the person will need to receive a qualifying receipt acknowledging their participation in the trip. If the church defines the amount for the trip, and it is paid directly to the church, then the church is allowed to record the payment in the participant’s giving record.
- participant and donor payments
- If the expenses of a church’s volunteers are valid expenses of an exempt organization, then it doesn’t matter who provides the payment for the expenses. This opens the door for trip participants to solicit donor contributions. If a church establishes the proper structure, the donations received can be used for a particular participant’s trip expenses and still allow the donor to receive a contribution receipt. Participants get their expenses paid and the donor gets a charitable contribution. However, the church must follow a strict structure to allow this win/win to occur:
- The funds must be processed by the church;
- The funds must not be solely designated for a participant; and
- The trip must meet requirements for valid “charitable travel.”
- The dollars he or she cannot specifically account for will be his or her responsibility to return to the church at the end of the trip. There is no presumption of exempt purpose;
- Where possible, receipts must be obtained for expenditures;
- A detailed log of all the trip’s expenditures must be maintained, indicating dates, identities of those who received the money, amounts, and purposes of the expenses;
- If funds are given to individuals for benevolent purposes, the trip leader will have the recipient sign that they received the funds and will document the benevolent need that necessitated the support.
Funds processed through the church. In order to be a valid deduction, the contribution must be to, or for, the benefit of the church. The standard of “for the benefit” allows any participant to deduct their expenses, but it won’t necessarily allow a third party to give money directly to the participant for the expenses and receive contribution credit.
To designate or not to designate. The church can allow the donors to indicate the particular participant they wish to support. However, it must convey to the donor that the church may use the donation for other participants, other mission trip expenses, or even future mission trips in the event the selected participant receives excess designated funds or the indicated participant does not go on the trip. This message should be contained in any fundraising material. The amounts paid by a donor or by a trip participant should not be considered as refundable, if the integrity of the donations for all trip participants is to be maintained.
Charitable travel. Internal Revenue Code Section 170(j) prohibits a charitable contribution deduction for travel expenses incurred related to the rendering of volunteer services to a charitable organization, “unless there is no significant element of personal pleasure, recreation, or vacation in such travel.” A taxpayer who only has nominal duties relating to the performance of services for the charity, or who for significant portions of the trip is not required to render services, is not allowed any deduction for travel costs.
Making sure that a trip meets the standard of “charitable travel” with “no significant element of pleasure” is the responsibility of the church. If the church cannot structure a trip to meet this requirement, then it should specifically inform participants and donors that there will be no charitable contribution allowed for the trip.
Planning the trip to meet this charitable travel requirement is only half the battle. To prove the extent and duration of volunteer services, and to prove the charitable travel standard, the church should keep an hour-by-hour itinerary of the entire trip. The itinerary should separate those times when the volunteers are on duty for the charitable organization from those times when the volunteers are free to choose their activities.
Unintended—and undesirable—fundraising consequences
Mission trip money also may be raised through group activities, such as car washes, spaghetti dinners, working local concession stands, and so on. These types of activities result in funds raised through the specific work efforts of one or more members of the group. It is common practice for a trip participant to have a portion of the funds raised allocated to their trip expenses. This method results in two undesired consequences:
Consequence No. 1: When money is credited to an individual’s account based on their work efforts, the individual has been paid for their efforts. This turns the volunteer into an employee, bringing with it all the complications and expenses that accompany regular employees. For example, the money credited to the participant’s trip account is taxable income to the participant and subject to payroll taxes and to payroll reporting.
Consequence No. 2: Fundraising activities do not automatically produce exempt income to the church. Most fundraising income is not considered unrelated business income due to one of the exceptions provided under IRC Section 513–that substantially all the work is performed by volunteer labor. In activities that result in Consequence No. 1, this exception is lost and the church must look to another exception, if one exists.
The only way to avoid these consequences is to allocate the profits to the entire group, whether or not they participated in the fundraising efforts.
Where does the money go?
Because a great number of short-term mission trips are directed at persons in other countries, the church must consider its responsibilities under the Patriot Act of 2001. The Patriot Act sanctions organizations and individuals who willfully provide funds to suspected or known terrorists. The act requires all U.S. businesses to clear recipients of funds by making certain those recipients don’t appear on any special lists (such as the listings of suspected or known terrorists) maintained by the U.S. Department of State and the U.S. Department of the Treasury. This requirement means that the church must vet all of the intended foreign recipients of funds that will be disbursed as a part of the trip.
Listings can be found at treas.gov/offices/enforcement/ofac/sdn/index.shtml and state.gov/s/ct/rid/other/des/123086.htm. Additionally, the church may wish to familiarize itself with the U.S. Department of the Treasury’s Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S. Based Charities in structuring any of its activities. This publication is available at treas.gov/press/releases/reports/0929%20finalrevised.pdf.
Track all expenses
Many foreign countries have no sophisticated system of receipting expenditures and many trip leaders fail to understand the documentation standards placed on a U.S. exempt organization. The trip leader should understand the following:
At this time, the IRS is very focused on exempt organizations’ activities in foreign countries. It is always best to remember that the IRS never presumes any expense is spent on exempt purposes until it is proven, and with expenses in foreign countries, the IRS tends to presume that the money was personally spent by the trip leader—or worse, with a terrorist.
At the end of the trip, someone with the church should be responsible for collecting all of the pictures, itineraries, samples of fundraising letters, testimonies, and so on that will provide the proof that the trip was a successful missions outreach. This file is often kept separately from the accounting department records. It is invaluable for proving the legitimacy of the trip in the event questions arise from outside authorities.