The Pros and Cons of Crowdfunding

It was an ordinary Sunday afternoon in the fall of 2017. Worship was just letting out at Burnette Chapel Church of Christ near Nashville when a gunman opened fire, first in the parking lot and then in the sanctuary. By the time the shooting ended, one church member was dead and seven others were wounded, including the minister and his wife.

Over the next few days, friends of the church sprang into action. They set up crowdfunding appeals to pay for funeral expenses, hospital bills, and other needs. All told, more than $37,000 was raised for victims on GoFundMe.com.

Appeals like this have become commonplace. When tragedy strikes—a fatal car wreck, a cancer diagnosis, a job loss, a natural disaster—Americans turn to crowdfunding as a way to help. About one in four Americans (22 percent) have donated to a crowdfunding site, according to a 2016 Pew Research report.

Crowdfunding has become a billion-dollar industry, built on the kindness of strangers, as Time magazine noted recently. And it’s likely to grow, said Dennis Wadley, a pastor and founder of Buck4Good.com, a crowdfunding site for churches and Christian nonprofits.

“Churches are going to have to start thinking about this [option],” Wadley said.

Creating a crowdfunding policy is a good first step for churches, said Ted Batson, tax counsel and partner at the accounting firm CapinCrouse. That way, a church can think through all the issues involved with crowdfunding ahead of time—rather than trying to respond in a crisis.

Among the issues to carefully consider:

Answering those questions takes time, said Batson, also an advisor at large for Church Law & Tax. It’s better to think ahead, he stressed. Otherwise, someone could set up a crowdfunding appeal in the church’s name, leaving a church scrambling to catch up or even doing damage control.

Church crowdfunding is simpler when a church project—or ongoing support for a charitable program—is involved.

Case in point: Several years ago, a nonprofit in Kenya that cares for children with disabilities ran short of funds. The parents of the program’s founder previously attended church with Wadley and asked him for help. The church set up a crowdfunding appeal and eventually raised more than $23,000. The funds came in the nick of time.

“They were down to the last $200,” Wadley said.

Things are trickier, Batson said, when a crowdfunding appeal benefits a specific person. According to Pew Research, about two-thirds of crowdfunding donors have given to an appeal to help a person in need.

When churches help individuals in need through benevolence funds, Batson said, they generally raise those funds for benevolence in general—not for specific people.

The main concern is that contributions for a specific individual are not tax-deductible, Batson explained. Instead, they are considered personal gifts. Those are legal, but not part of a church’s charitable purpose.

If an appeal is for an individual—and a church’s employer identification number (EIN) is used for the appeal—that can cause trouble, warned Elaine Sommerville of Sommerville & Associates, a CPA who specializes in working with nonprofits and serves as a senior editorial advisor for Church Law & Tax.

A church can raise money for its benevolence fund and then decide to give funds to an individual, she said. But a church can’t set up a crowdfunding appeal—or advertise for a crowdfunding appeal—that’s designed for a specific person.

When you set up crowdfunding for a specific individual, the church isn’t in control of the how the funds are used, she clarified.

“Churches and nonprofits may not raise funds for a specific individual and cannot provide platforms for fundraising for a specific individual,” Sommerville stressed. “Therefore, a church must take special care to make sure its EIN is not used to register any account where the fundraising is for a specific person.”

There are some cases where tax-deductible donations can benefit an individual, Batson explained.

For example, church members who go on mission trips often send out appeal letters asking for financial support. Increasingly, crowdfunding sites are used for those types of trips. The church should have a policy for approving such projects—and for approving any appeals that are sent out for such projects. The church also should set up a procedure for getting information about the donors so that it can issue a receipt.

If the mission trip is approved by the church and the donations are made to the church and the church maintains discretion and control over the funds, those donations can be tax-deductible, Batson said. That’s true, even if the person who sent out the letter also benefits—by having their airfare and other expenses covered by the donations.

The key is that the church retains control over the funds and how they are used, Batson stressed.

Churches can give money to individuals if they are needy or in distress, said Dave Moja, a CPA and a partner with CapinCrouse. To do this, the church needs to verify the needs—whether the benevolence funds used to meet it comes through the collection plate or through a crowdfunding site.

Moja said the Internal Revenue Service (IRS) has indicated that those who are needy and distressed are somehow “lacking the basic necessities of life, involving physical, mental or emotional wellbeing as a result of poverty or temporary distress.” With that in mind, the IRS’s “needy and distressed test” could be met by the church establishing a set of criteria by which they might objectively make distributions to financially or otherwise distressed individuals and/or families.

The best way to run a crowdfunding appeal for those in need, Moja said, is to make it clear that the church has sponsored the appeal, the church exercises control over the funds, and that the monies raised are for the church’s benevolence fund. But the church should make sure that the person they are seeking to help meets the “needy and distressed test,” he reiterated.

“I also like to make sure churches have a selection committee or board to award the funds,” he said.

When Journey Church in Kenosha, Wisconsin, learned that a church member had passed away suddenly, leaving his wife and kids in financial hardship, they partnered with Blessity.org to raise funds to assist her.

The family needed several thousand dollars, said Journey Church executive pastor Bob Griffith, which would have severely stretched the church’s benevolence funds.

Journey, like many churches, has a benevolence fund that can handle small expenses—buying some groceries, paying an overdue electric bill or a month’s rent. But larger needs—a funeral or medical bills—are another story.

“We aren’t able to help with that kind of need,” Griffith said.

That’s where crowdfunding helped, said Tad Hartlaub, cofounder of Blessity.org.

“For a family facing a catastrophic event, a few thousand dollars can make a big difference,” he said.

At Blessity, churches sign up as partners with the organization. They have to submit proof of tax-exempt status, and they have to vet any appeals beforehand.

Blessity then posts a description of the need, including a specific dollar amount. Once that amount is raised, the appeal is shut off.

The funds are then sent directly to pay for bills: to a hospital or utility company, for example. The person in need never touches the money.

Churches aren’t charged a fee for using Blessity. But they are asked to give a donation to the site once the appeal is over.

Hartlaub said that using crowdfunding can supplement normal giving to his church. As an example of this, he said that he and his wife give their offerings at church on Sunday, which include giving to the church’s benevolence fund. And crowdfunding, he explained, is something extra. It’s a way to put disposable income to good use.

“It’s like an extra kicker on top of normal giving,” he said.

Some churches may choose to avoid crowdfunding, in part, because it’s hard to keep track of donors.

“You are going to be dealing with a lot of contributions from people who may not be associated with the church,” said Batson. “They may want a receipt. And you may not have enough information to issue a receipt.”

Some crowdfunding sites allow a nonprofit to register as a charity—and then will issue receipts to donors. Other sites specialize in raising funds for nonprofits and will know how to handle receipting.

And some donors may not want a receipt at all. Moja said that the standard deduction has doubled under the new tax law passed at the end of 2017, making it less likely that people will itemize their taxes starting in 2018. So, many may not expect a receipt for gifts to a crowdfunding appeal.

Another provision of the tax bill—the annual gift tax exclusion amount—increases for 2018 to $15,000 (from $14,000 previously). So people can give to someone who is in need or to a worthwhile project without worrying about whether the gift is deductible.

“You won’t get a tax deduction but you will get a warm feeling in your heart,” said Moja.

Ashley Tuite, an attorney with the law firm Gammon & Grange P.C., said that churches should remember that crowdfunding appeals are out there for all to see.

This fundraising method works because it taps into broad social networks, she said. That’s good for raising money. But it also means that it opens a church up for greater public scrutiny.

So, a church must be careful about what it posts during a crowdfunding appeal. Poor decisions and careless mistakes could not only hurt a church’s reputation but also create various legal issues. The church could also jeopardize its intellectual property.

Churches must be careful about intellectual property, such as the church logo or other material that is posted in an appeal. Make sure the church’s intellectual property is adequately protected. Once it is published on a crowdfunding site, others may try to copy a trademark that is not registered.

And keep a lookout to make sure other people aren’t using the church’s name to promote their own appeals, Tuite stressed.

“You don’t want individuals to create a crowdfunding appeal without the approval of the church,” she said. Doing so could give the impression that the church approves of a project or has authorized it.

Batson said that the best approach for a church is to maintain control of any crowdfunding appeal that uses the church’s name.

Any appeal should be approved by church leaders, he said. And if a church finds that someone else is using the church’s name for an appeal without permission, the church should contact the crowdfunding site and ask that the church’s name be removed.

Tuite said that churches should read all the fine print before deciding to use any crowdfunding option. That includes asking about fees—most sites take a percentage of donated funds to pay for their services.

The church also should ask if the site has time limits for appeals—and what happens to the donations if the appeal doesn’t reach its goals, Wadley said.

The church should check the site’s reputation. Look at online reviews and check with the Better Business Bureau. And look at other projects on the site to see if the church’s project fits in, Wadley recommended.

Further, look at all the services a site offers, Wadley said. Some do a better job of promoting projects. And some make it easier for churches to connect with donors than others.

Finally, check with an attorney before starting a crowdfunding project. And work with someone well versed in local law.

In most states, churches are exempt from registering for charitable solicitations. But churches may lose their exemption in some states if contributions outside of church membership become predominant, Tuite said.

“It’s best to talk to a local attorney,” she stressed.