Background. At some time or other most churches receive a postdated check. Such checks often are received at the end of the year when some donors decide they will be better off for tax purposes if they delay their contribution until the following year. Other donors make gifts of postdated checks before leaving on an extended vacation or business trip. How should church leaders handle these checks? Are they legal? Should they be retained? Returned? When should they be receipted as a contribution? When can they be endorsed and deposited?
Questions regarding postdated checks do not always involve contributions. For example, can churches use postdated checks to pay their payroll tax obligations? What if a minister or church employee pays a business expense at the end of a year with a check that is dated the next year? For these and other reasons, it is important for church leaders to be familiar with the rules that apply to postdated checks.
This article will review eight things that church leaders should know about postdated checks.
#1 – Definition. A postdated check is a check that bears a future date. For example, Frank writes a check for $100 on May 1, 2008, that he dates July 1, 2008. “Predated” checks are the opposite. They bear a date in the past.
#2 – Like promissory notes. One court defined a postdated check as follows:
A postdated check is not a check immediately payable but is a promise to pay on the date shown. It is not a promise to pay presently and it does not mature until the day of its date, after which it is payable on demand the same as if it had not been issued until that date.
In other words, a postdated check is treated like a promissory note. It is nothing more than a promise to pay a stated sum on or after a future date. It is not an enforceable obligation prior to the date specified.
Article 3 of the Uniform Commercial Code (which governs checks and other forms of negotiable instruments), and which has been adopted by all 50 states, specifies that when a check is postdated “the time when it is payable is determined by the stated date.”
#3 – Handling postdated charitable contributions. Since a postdated check is no different than a promissory note, it should be treated the same way. If someone issues a note to a church, promising to pay $1,000 over the course of the next twelve months, no charitable contribution is made when the note is signed (assuming the donor is a “cash basis” taxpayer). Rather, contributions are made only as payments are actually made on the note. Until then, there is only a promise to pay.
Like a promissory note, a church ordinarily should simply retain a postdated check until the date on the check occurs. There is no need to return it. In some cases, a bank may be willing to accept such a check for deposit before the date on the check has occurred, with the understanding that the funds will not be available for withdrawal.
Example. Jane wrote a check in the amount of $1,000 to her church during the last service of 2007, and placed it in the offering. She dated the check January 1, 2008, however, in order to claim a deduction in 2008 rather than in 2007. She did so because she believed her taxable income would be higher in 2008 and so the deduction would be “worth more” in that year. The check was a mere promise to pay on the day it was given to the church, and so no charitable contribution occurred. The charitable contribution occurred on January 1, 2008. On that date the check was more than a mere promise to pay. It was a legally enforceable commitment. The church should record the check as a 2008 contribution.
Example. Jack makes weekly contributions of $100 to his church. In anticipation of a month-long business trip, Jack issues four checks in the amount of $100 each that he postdates for the next four Sundays. He places the checks in the offering during a church service prior to leaving on his trip. The church should record each check as a contribution on or after the date specified on the check.
Example. Lynn mails a check to her church on December 30, 2007 that is dated January 1, 2008 and that is received by the church on January 2, 2008. A contribution in the form of a check is effective on the date of delivery with one exception—a check that is mailed (and postmarked) in one year is deductible in that year even though it is not received by the church until the next year. This of course assumes that the check is accepted for deposit by the bank. In this case, however, the “mailbox rule” does not apply since the check was postdated. The church treasurer should record Lynn’s check as a 2008 contribution.
#4 – How do banks treat postdated checks? The Federal Reserve Board has published rules addressing when deposited funds become available for withdrawal. The rules specify that banks having “reasonable cause to doubt the collectibility of a check may hold those funds.” Postdated checks are cited as an example of a situation when a bank could doubt the collectibility of a check. What does this mean? A bank need not permit withdrawals of any funds deposited by means of a postdated check until the date on the check has occurred.
Example. Dale deposits a check in the amount of $1,000 in the offering during a worship service. The check bears a date that is 30 days in the future. The church treasurer attempts to deposit the check in the church’s checking account a few days after it is placed in the church offering. The bank may refuse to accept the check, or it may accept it with the understanding that the funds will not be available for withdrawal until the date on the check has occurred.
#5 – How does the IRS treat postdated checks? The IRS has instructed its agents and offices to return postdated checks to the taxpayer. However, local offices are given the discretion to decide in particular cases whether the period of postdating is short enough that it does not warrant refusing the check and mailing it back to the taxpayer for replacement.
#6 – Criminal implications. Several courts have addressed the question of whether postdated checks create criminal liability. Most have concluded that persons who issue postdated checks can be guilty of the criminal offense of issuing a bad check if they knew when the check was issued that it would be rejected due to insufficient funds when presented to a bank on the date specified on the check.
Example. Don purchases a church vehicle for $10,000. Don gives the church a check in the amount of $10,000 that bears a date 45 days in the future. When the church treasurer attempts to deposit the check 45 days later, she is informed by a bank official that the check cannot be accepted due to insufficient funds. If Don knew at the time he issued the check that there would not be sufficient funds to cover the check on the later date, he can be prosecuted for issuing a bad check.
#7 – Recognizing income. A taxpayer who receives a postdated check from an employer does not recognize income before the date of the check. Prior to that date, it is a mere promise to pay.
#8 – Payment of expenses. Sometimes a minister or other church employee will pay a business expense at the end of the year with a postdated check bearing a date in the next year. Once again, this is treated as an unpaid promissory note in the current year and so the expense is not deductible on the current year’s tax return. The deduction must be claimed in the following year (the same year that the check is dated). Again, this assumes that the taxpayer reports income and expenses on the cash basis (as is true for most individual taxpayers).
This article first appeared in Church Finance Today, April 2008.