What to Do with a Nondeductible Donation

Best practices for church treasurers.

What should church treasurers do when a member attempts to contribute a check for a specified benevolence recipient and it is clear that the contribution is not tax-deductible?

Four options

A number of alternatives exist, including the following.

Refuse to accept the check

This is the conclusion reached by the IRS in Publication 3833, which states, “Donors cannot earmark contributions to a charitable organization for a particular individual or family.” Church treasurers should keep this example in mind when church members want to make contributions to the church for the benefit of a specific needy person or family. Since such contributions are not tax-deductible by the donor, the church should not receive them.

Accept the check but stamp it “NONDEDUCTIBLE” on its face in red ink

This would prevent the donor from using the canceled check to substantiate a charitable contribution deduction. Churches that choose this alternative should have an appropriate stamp made by a local office supply store. They also should be certain not to list the check as a contribution on the summary of contributions provided to the donor.

Place an asterisk by nondeductible contributions on the summary of contributions that the church provides to donors

This alternative is not sufficient for contributions of less than $250, since donors can use canceled checks to substantiate these contributions without any written acknowledgment or receipt from the church. If a donor’s designation does not appear on a check and the check is accepted by the church and not stamped “NONDEDUCTIBLE,” it is possible for the donor to claim a deduction with little risk of it being disallowed. The church would be contributing to the possibility of an impermissible charitable contribution deduction.

Honor every donor “recommendation”

If a church routinely honors every “recommendation” made by donors regarding the individual recipient of their contributions, this strongly suggests that the church does not exercise sufficient control over those contributions for them to be treated as charitable contributions. The IRS Exempt Organizations Continuing Professional Education Technical Instruction Program for 1996 contains the following statement: “In circumstances where the organization is directing all, or close to all, donor contributions to the use of individuals specifically preferred by those donors, a review of the facts should . . . determine whether the organization is in control of the funds. If control is not in the hands of the organization, it may be appropriate to refer the [matter to the IRS national office].”

Reviewing the church charter

If your church has established a benevolence fund, you may wish to review your corporate charter or other organizational documents to be sure that your statement of purposes includes “charitable” as well as “religious” purposes. Some legal precedent suggests that benevolence activities are more properly characterized, for tax purposes, as charity rather than religion.

Tip. One way to determine whether a person or family is sufficiently needy to qualify for benevolence assistance is to see if they fall below the poverty guidelines published each year by the U.S. Department of Health and Human Services (HHS). These guidelines are published on the HHS website. Obviously, a church can make a persuasive case that persons or families below the federal poverty guidelines are needy and can receive distributions from a church’s benevolence fund. However, this conclusion has never been adopted by the IRS or any court.

To learn more about how to establish an effective benevolence program at your church, see the digital resource, Benevolence Fund Basics, available on ChurchLawAndTaxStore.com.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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