Missions is an essential component of any church budget. But the ins-and-outs of supporting missions and missionaries are fraught with potential tax and legal issues. By following these seven guidelines, you can avoid many financial headaches and more easily navigate the often tricky area of missions funding.
1. Donors give to missions, not to missionaries
Zach wants to give to his niece’s summer missions trip, so he writes a check in her name and drops it in the offering plate. But Zach might be jeopardizing his chances of receiving a deduction.
Why? Donations must be given to a specified fund and not to an individual.
CPA Elaine Sommerville explains: “The church can allow the donors to indicate the particular participant they wish to support. However, a church must convey to the donor that it may use the donation for other participants, other missions trip expenses, or even future missions 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.”
See “Designated Contributions” in Church Finance (pages 72-76). For specific insights on fundraising, see “Rule 3—individual quid pro quo cash contributions of $75 or less” and “Rule 4—individual quid pro quo contributions of more than $75” (pages 81-83).
2. Fund foreign activities through missions agencies
While on a business trip, Lindsey, one of your elders, visits a small, struggling church in a developing country. She is impressed by the pastor’s efforts to reach out to his impoverished community. When she returns home, Lindsey talks to her pastor and fellow elders about providing funds to help this pastor and his church.
While Lindsey’s heart is in the right place, Frank Sommerville, an attorney and CPA, says such funding ventures are extremely risky.
“The IRS rules require that you maintain something called ‘expenditure responsibility’ over the funds that you send outside of the United States,” says Sommerville. “What that means is your church is responsible for how those funds are spent. So when you’re sending funds overseas you need to make sure the lumber that you paid for actually goes into building the church and not building the house for someone who’s over there.”
Then there’s the problem of funds inadvertently falling into the wrong hands.
“If any of those funds end up in a terrorist state, or in a terrorist organization, or supporting a terrorist or even a suspected terrorist,” says Sommerville, “that’s a criminal offense and the church treasurer and the missions committee that approved the transfer [of funds] could be looking at prison time.”
Sommerville strongly advises churches to work through their denominational missions agency or a well-established nondenominational missions organization.
See “Contributions made to or for the use of a qualified organization” in Church Finance (pages 70-71).
3. A church must justify compensation for missionaries it supports
Tyler has attended your church from infancy and is now graduating from college with a degree in missions studies. Within the next 18 months, he hopes to head out to a foreign missions field. Your church is excited to support him and makes plans to do so. But how much support should he receive?
Frank Sommerville says that funds given must further the “exempt purpose” of your missionary endeavors and they must also add up to a “reasonable amount” of compensation.
“The church has a responsibility for determining what a reasonable amount of compensation would be,” says Sommerville. “The church also needs to determine whether or not other churches are involved in supporting this missionary. If you had 20 churches sending $1,000 a month, that’s $20,000 in income. In most places in the world, taking even $10,000 a month is going to be considered excessive. So you have to be aware of all of the funds coming from U.S. churches and how those funds are spent.”
Sommerville says that careful records must be kept of all expenditures, and he suggests that the missionary keep a daily activity log to help justify his or her compensation.
See “Missionaries” in the annual Church & Clergy Tax Guide (Chapter 8).
4. Distinguish ministry days from personal days
A group of adults from your church is heading off to Ecuador for a three-week missions trip this summer. At the end of the volunteer ministry work, the group plans to spend a couple of days seeing the local sites. Before the group leaves, this question comes up: “Will all our travel expenses be deductible?”
The answer: Only those days spent in actual ministry are deductible.
“A ministry day is where you are ministering for the benefit of others,” says Frank Sommerville. “A personal day is a vacation day. And the expenses related to a personal day are not tax-deductible.”
To validate actual ministry days, Sommerville encourages the missions team to keep a daily log of missions-related activities.
See “Principle 3: no significant element of personal pleasure” in the Church & Clergy Tax Guide (Chapter 8).
5. Participants must actually participate
Tim, your church’s youth pastor, wants to take his wife and young children on a summer missions trip. Although he’s pretty sure funds raised for his family’s travel are tax-deductible, he admits that his wife will be busy taking care of the kids and that she’ll have little involvement with “doing ministry.” Is Tim’s assumption correct?
“No,” says Richard Hammar. “Contributions given toward the travel expenses of the youth pastor’s wife and children would not be tax-deductible, because their travel is not primarily for ministry purposes.”
See “Principle 3: no significant element of personal pleasure” in the Church & Clergy Tax Guide (Chapter 8).
6. Serving is not deductible
Your missions team has enlisted three carpenters for a summer trip to India. During early planning meetings, one of the carpenters asks: “Will we be able to deduct the time we spend using our skills?”
Church Finance says, “No deduction is allowed for contribution of services. Church members who donate labor to their church may not deduct the value of their labor.”
See “Donated services” in Church Finance (page 66).
7. Travel expenses must be ministry-related and correctly documented
During prep meetings for an upcoming missions trip, the missions pastor assures participants that all “reasonable travel expenses” will be deductible.
The missions pastor is most likely correct. The Church & Clergy Tax Guide says, “Travel expenses incurred during a short-term missions trip which may qualify as a charitable contribution include air, rail, and bus transportation; out-of-pocket car expenses; taxi fares or other costs of transportation between the airport or station and your hotel; lodging costs; and the cost of meals.”
But remember: The travel must be for ministry and not for fun. And for expenses exceeding $250, the participant must keep a record of travel expenses, such as a copy of the plane ticket, and have written documentation from the church. This documentation should detail the services provided by the participant and should state that the participant received no goods or services in return for his or her volunteer work.
For a list of four specifics that should be in the church’s document, see “Unreimbursed expenses” in the Church & Clergy Tax Guide.
