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Understanding Holy Land Trip Tax Deduction Rules

Discover when a pastor’s Holy Land trip is taxable and how IRS rules define deductible travel expenses.

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Last Reviewed: January 9, 2025

Our church’s CPA says that because a Holy Land trip will serve in the continuing education of our pastor, it would be a tax-deductible expense. Is this correct?

The answer is no. While a trip to the Holy Land may benefit a minister’s ministry, it does not qualify as a tax-deductible business expense under current tax law. Here are the key reasons why:

When Is a Holy Land Trip Taxable?

The church’s payment for a pastor’s Holy Land trip constitutes taxable income if either or both of the following apply:

The trip is provided to honor the minister for their faithful service to the church.
The trip is provided to enhance or enrich the minister’s ministry. Although the trip may benefit the minister’s work, it is considered personal travel and not a business expense under the tax code.

The tax code explicitly states that “no deduction shall be allowed … for expenses for travel as a form of education” (IRC 274(m)(2)). This means the church’s payment for the trip, including transportation, meals, and lodging, must be treated as taxable income and reported on the minister’s Form W-2 (or Form 1099-MISC if they are self-employed).

If the primary purpose of the pastor’s trip is business-related, such as speaking or teaching, then the expenses may qualify for reimbursement under the church’s accountable plan. Determining whether the trip is primarily business-related depends on:

The length of the trip.
The proportion of time spent on business versus personal activities.

If the trip meets these criteria, the church can reimburse the expenses as a non-taxable benefit, provided proper documentation is submitted.

FAQs

Are Holy Land trips ever tax-deductible?
No, unless the trip’s primary purpose is demonstrably business-related and meets IRS criteria for deductible expenses.
What expenses must be reported as taxable income?
All expenses paid for a personal Holy Land trip, including transportation, meals, and lodging, must be reported as taxable income.
How should a church handle reimbursable business travel?
The church should use an accountable plan to reimburse verifiable business-related travel expenses.
What happens if the trip is part business and part personal?
Only the expenses directly related to the business portion of the trip may qualify for reimbursement under an accountable plan.

Churches and pastors should work with a qualified CPA to ensure compliance with IRS regulations and avoid potential tax issues.

For further help navigating any funding of overseas activities by your church, see Chapter 4 of the Church & Clergy Tax Guide.

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

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Effective Strategies for Navigating Difficult Conversations with Your Church Team

Navigating tough conversations with your church team doesn’t have to be daunting. Pastor Karl Vaters shares eight practical tips, from leading with positivity to correcting with grace, to help you address challenges without losing trust or morale.

Karl Vaters

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Last Reviewed: January 28, 2025

Editor’s Note: Sometimes we need to have difficult conversations with those we lead. What’s the best way to do it? Or more specifically, what’s the best way to do it and not lose quality team members and volunteers? Pastor Karl Vaters offers these eight tips:

1. Lead with the good news.

No one in my church, staff, board, or volunteer teams ever dreads my arrival. Why? Because I always walk in with a “hello” and a chance to catch up on the good news of the last day or week.

Yes, we deal with the problems. But, unless it’s an immediate emergency, it can wait.

2. Never address a problem when you’re angry.

Do I really need to explain this one? Nah, I didn’t think so.

3. Don’t treat mistakes like sins.

Volunteers work hard, do a great job, but leave something petty undone. What happens? They’re treated as though they’ve committed a sin that requires prayer, tears, and repentance.

A full garbage can left after a youth event is an oversight, not a sin. Treat it accordingly.

4. Recognize the difference between laziness and risk-taking innovation.

No one in my church ever got in trouble for trying something new that didn’t work. That’s something I want to encourage.

“Innovate,” I say. “Take risks. Dream big. Fall down, then get back up.” I never criticize that, I praise it. But if someone is chronically late, unprepared, leaving early, or any other signs that they’re lazy and not giving it their best, we’ll have a talk.

5. Designate a good time and place to deal with problems.

We do this at our weekly staff meeting. We start with prayer. We have a designated time to share positive ministry stories. And we have a permanent agenda item I call “Oops! Notices.” If anyone noticed anything since the last meeting that was an Oops!, we bring it up then.

For example: “I came in and one of the back doors was unlocked” or “I had to vacuum the fellowship room after the Kids’ Night event.”

We report the issues, recognize how the Oops! happened, offer apologies if needed, then move on.

Using a word like Oops! may seem silly, even childish to you, but that’s the point. It allows us to recognize the issues, address them for what they are (mistakes, not sins), and deal with them without anger or shame attached.

After all, how mad or embarrassed can anyone get over an Oops!?

6. Deal with private issues in private.

If the issue is bigger than an Oops!, I deal with people one-on-one. It reduces potential embarrassment and allows for a deeper look at real problems.

7. Approach correction as a learning experience, not a punishment.

Our church is always in process of training young, new ministers. So they make a lot of mistakes. But they come to our church because they know they can make mistakes, get them corrected, and learn to do better next time without anyone getting mad at them.

Punishment is reserved for sins. And that’s God’s job anyway. Mistakes are something we can always learn from.

8. Recognize and correct your own faults first.

Many of the issues we think are staff/volunteer problems are actually pastoral leadership problems. We haven’t communicated well. We don’t have proper systems in place. Or we’re chronic complainers over petty issues.

This post first appeared on NewSmallChurch.com and is adapted with permission.

Karl Vaters runs the New Small Church blog, serves as lead pastor of Cornerstone Christian Fellowship in Fountain Valley, California, and is the author of The Grasshopper Myth.

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Are Mission Trips Tax Deductible? Key Guidelines for Churches

Discover when mission trip expenses are tax-deductible and how churches can manage contributions effectively.

Richard R. Hammar, Attorney, CPA

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Last Reviewed: January 24, 2025

Q: For my church’s short-term mission trips, participants give the church money for a special fund that’s used to pay their trip expenses (airfare, lodging, and so on). Some participants believe the money they spend for a trip is tax deductible and should be listed on their contribution statements. A mission organization I contacted agrees with this thinking. My understanding, though, is that only funds for a ministry and not for an individual are deductible. Who is correct?

Determining whether mission trip expenses are tax-deductible depends on specific conditions. I will defer to the guidance provided in chapter 8 of the Church & Clergy Tax Guide. Based on your description, here’s a scenario that aligns closely with your situation:

Key Scenario: Tax-Deductible Mission Trips

Participants: Adults
Who pays travel expenses (transportation, lodging, meals): The church
Does the church receive designated contributions from participants or others? Yes, from participants, in the amount of their travel expenses paid by the church.

Tax Consequences

Assuming the trip was preauthorized by the church board or membership and furthers the church’s exempt purpose:

Payments by participants to their church are deductible as charitable contributions if the trip involves “no significant element of personal pleasure, recreation, or vacation.”
Participants’ payments can be reported by the church treasurer on giving statements. If expenses are $250 or more, the church’s receipt must comply with substantiation requirements.

For more details on how trips should be organized and how the IRS defines “personal pleasure, recreation, or vacation,” refer to chapter 8 of the Church & Clergy Tax Guide.

Frequently Asked Questions

1. What qualifies a mission trip as tax-deductible?

A mission trip qualifies as tax-deductible if it is preauthorized by the church and primarily furthers the church’s exempt purpose. It must lack a significant element of personal pleasure or recreation.

2. Can participants deduct the cost of travel expenses?

Yes, participants can deduct the cost of their travel expenses paid to the church if the church directly pays for the trip’s costs and the trip aligns with the church’s purpose.

3. What must be included in the church’s contribution statement?

The contribution statement must include the participant’s name, the amount contributed, and a statement confirming that no goods or services (beyond intangible religious benefits) were received in exchange for the donation.

4. What happens if a trip includes personal recreation?

If a mission trip includes significant personal recreation or vacation elements, participants may not deduct the associated expenses as charitable contributions.

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

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How Churches Can Avoid Financial Trouble: Expert Insights

Expert tips for churches on managing financial trouble and avoiding bankruptcy through strategic turnaround plans.

Ashley Moore

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Last Reviewed: January 26, 2025

Ken Philip, a financial crisis management consultant at Ark Builders, specializes in the turnaround of troubled churches and religious organizations. We asked him how churches get themselves into financial trouble, and how they can get out of it.

How do churches get themselves in financial trouble?

They get into trouble in two ways. First, they don’t have an operational or financial plan. And the second way is by not creating good management reporting systems to monitor their operational and financial plans.

Should churches in trouble ever file bankruptcy?

They should almost never file–there could be a compelling reason that they need to. Maybe fraud. But bankruptcy doesn’t work well for a lot of organizations. It can become very litigious, and it often takes a lot of money to get through it. Even if you’re a $50 million or $100 million company, you might not be able to survive bankruptcy because it takes too much time and money.

What do you recommend instead of filing bankruptcy?

Out-of-court arrangements–a negotiated arrangement where when you get stakeholders together (lender(s), church governance/leaders, others with a “stake” in the outcome) and you get agreement to a turnaround plan. In order to make such an arrangement you have to know what the problem is. And then you craft a solution and you bring it to your members and everyone needs to get on board.

If you can’t do an out-of-court arrangement, you have a receivership option. A receivership is monitored by the court, but there aren’t the kinds of rules that apply in bankruptcy. It’s subject to a more commercially reasonable, common-sense solution, so you can get things done quickly and more efficiently. In my view, the ideal solution is to resolve any issue out of court. But if you can’t do that, use a receivership vehicle.

As a technical matter, most receiverships are state receiverships. Most states have a receivership statute. Those statutes are generally fairly simple. A receiver is responsible for developing a plan and putting that plan in front of a court and seeking the court’s approval. Such a plan is most often developed in concert with all stakeholders.

Let’s say a church believes its getting close to bankruptcy–it is one or two months out from being in huge trouble. What are the top things a church in trouble needs to do?

The very first thing you should do when you see a financial problem is to do something. The natural human tendency is to avoid things and think it’ll get better. People must face the facts.

Second, the church needs to engage an expert in these types of financial and operational situations. No matter how good its staff is, they aren’t experts in managing the issues related to turnaround and crisis situations. For the most part, the skills or abilities needed don’t exist in a church. This is especially true because financial problems are most often a symptom of a larger problem.

If a church came to me and said, “I think I’m in trouble,” I’d take these steps:

First, I would figure out how serious the problem is. Are you running out of money tomorrow? Or are you in an earlier stage?

I would then do an assessment of the organization. An operational and financial assessment figures out where exactly the problems are in the finances and in the ministries.

Finally, I’d provide a (written and oral) report. This report details the problems as determined in the financial and operational assessment and recommends a going-forward (turnaround) plan.

Since each church’s situation is unique, it really does need a consultant to come in and see where its revenue and ministries got imbalanced. You have to figure out the real problem.

For example, take this hypothetical scenario:

A church (2,000 attendees) has a big new building that it built, and it has a mortgage of $5 million or $10 million. But something happens where the church can’t make payments on that mortgage for whatever reason. You have to figure out the problem. Was the building too large? Did it start ministries that are costing too much money? And then develop a solution. Maybe the church needs to stop certain ministries. Maybe it needs to say to its mortgage company, “We need to lower our payment.”

If a church gets into trouble because it can’t pay its mortgage, there’s no advantage to the mortgage company to see the church go into bankruptcy or receivership. If you’re the church, you want to develop a plan that will be successful. So you go to the debt holder and you make an arrangement, an accommodation, to help work out this problem.

Are mortgage companies willing to work with a church in this way?

Most are, some aren’t. But if it is faced with a situation where your church is going to go dark and the mortgage company is going to have an empty building it can’t sell, or your church is threatening to file bankruptcy, and the money you would be paying the mortgage company is now going to legal fees and attorneys, the company would rather work with you.

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Should Churches Own Multiple Bank Accounts?

The risks of allowing each church group to have one.

Vonna Laue, CPA

Bio

Q: Most of our church’s Sunday school classes and groups have their own bank accounts, but use the church’s federal identification number for those accounts. The finance committee has no oversight of these accounts, and no control over the funds or how they’re spent. Is this appropriate?

It seems convenient to let each group have an account so that each can tap into its budgeted money when needed. But such an approach isn’t advisable. The conventional wisdom in the church finance world is for churches to limit the number of bank accounts the church uses. Ideally, a church should use only one or two. The logic is generally based upon the following five tips:

The more accounts created, the easier it is for someone to disguise and/or mask fraudulent activity;
The more accounts created, the more administrative work required to monitor, oversee, and reconcile accounts on an ongoing basis;
The more accounts created, the greater the likelihood of having funds erroneously deposited or withdrawn from the wrong accounts;
The more accounts created, the more chances created for outsiders to steal account numbers that can be used for electronic fraud;
The more accounts created, the more checkbooks created, and the harder it will be to track and to secure blank checks.

Vonna Laue has worked with ministries and churches for more than 20 years. Vonna was a partner with a national CPA firm serving not-for-profit entities through audit, review, tax, and advisory services. Most recently, she held the role of executive vice president for a Christian ministry that works to enhance trust in the church and ministry community.

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Managing Church Credit Cards: Best Practices for Avoiding Issues

Best practices for managing church credit cards and avoiding financial missteps.

Vonna Laue, CPA

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Last Reviewed: January 26, 2025

A corporate credit card can seem like a useful tool for churches: a convenient and easy way for staff to make the purchases they need to do their jobs. Yet at many churches, the corporate credit card results in headaches and hassles. The bill is due whether or not staff members have submitted the necessary receipts and information, but documentation always seems to be missing or late.

Misuse of a church credit card can lead to more serious issues than headaches, hassles, and wasted time, however. It can result in inappropriate expenses and even finance charges. Fortunately, this can be prevented with adequate considerations and policies.

Assessing the need

If your church does not currently have a corporate credit card, the first step is to assess whether or not you truly need one. While a corporate credit card can make purchases more convenient for staff, consider what it will take to create and enforce a credit card policy, and to reconcile the account each month.

If your church decides that it would benefit from a credit card, the next step is to determine which staff members will receive one. You may have staff members who want access because they don’t have enough financial credit to use their personal cards for large purchases. Church leadership should be responsible for deciding who receives a card, however, not the individual staff members.

Setting policies

It’s important to set clear policies governing the use of corporate credit cards. These should address:

How individual reporting will be monitored. Each credit card charge should be reviewed and approved by the individual’s immediate supervisor. This protects the individual as well as the church. If there are staff members without a direct supervisor, such as the senior pastor, a member of the governing board should periodically review the charges.
Required documentation. This should be similar to the requirements for personal expense reimbursements. Credit card statements do not provide sufficient substantiation. Instead, card users should provide receipts for all their charges, along with an explanation of the ministry purpose. If the expense is for a meal, the explanation also should include the names of those who were present.
Expectations for use. In addition to outlining the required documentation, your policies should cover additional expectations for use, including timeliness in submitting receipts and a definition of appropriate charges. The consequences of noncompliance should also be included.

Ensuring compliance

Whenever a staff member receives a church credit card, they need to be informed of your policies. If you run into compliance issues, it’s also a good idea to reinforce the policies in a staff meeting or email. Any concerns should be discussed with church leadership or the finance committee.

Perhaps someone always submits documentation late, often loses receipts, or frequently uses the card for personal purchases. Everyone makes mistakes and can misplace a receipt or grab the wrong card out of their wallet, but ongoing issues should be addressed. Many churches revoke cards if individuals fail to comply with set policies.

Corporate credit cards can be very useful for church staff, but they need to be used properly, with adequate documentation provided on time. The guidelines and policy tips above can help your church ensure that credit cards are helpful to your ministry efforts, rather than a hindrance.

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Form 8822-B Requirements for Churches: Staying Compliant

Discover why churches must comply with Form 8822-B requirements, including timely updates to the IRS about responsible party changes.

Richard R. Hammar, Attorney, CPA

Bio

Last Reviewed: January 11, 2025

Any church that has employees, files employment tax returns, or maintains a bank or brokerage account must have an Employer Identification Number (EIN). This requirement applies to nearly every church in the United States.

In 2010, the IRS introduced a process to collect information about the “responsible parties” associated with EINs. This step aimed to ensure that all tax-related correspondence reached the appropriate individuals. The IRS requested the name and Social Security number of a responsible party through Form SS-4, which is used to obtain an EIN.

The Introduction of Form 8822-B

By 2013, the IRS became increasingly frustrated with its inability to contact responsible parties identified on Form SS-4. Many responsible parties had moved, resigned, or passed away. As a solution, the IRS established a new requirement for all EIN holders: the need to report changes in their responsible party using Form 8822-B. This change was first announced on November 18, 2013, in the IRS newsletter Employee Plans News:

Key IRS Announcement:

“Beginning January 1, 2014, any entity with an EIN, such as a plan sponsor, must report a change in the identity of their plan’s responsible party on Form 8822-B, Change of Address or Responsible Party – Business, within 60 days of the change.”

Clarifying Form 8822-B Requirements

Church leaders were initially confused about this requirement. While the IRS did not impose penalties for failing to meet the original March 1, 2014, compliance date, the agency strongly encourages timely reporting of any changes to responsible parties. Failure to submit Form 8822-B could result in missed correspondence, including:

Warnings about incomplete paperwork
Notices of taxes owed
Information about potential fines and penalties

To remain compliant, churches must notify the IRS of any changes to their responsible party within 60 days by filing Form 8822-B. This ensures that critical IRS communications are directed to the appropriate individual.

Why Compliance Matters

Filing Form 8822-B helps churches avoid miscommunications with the IRS that could lead to administrative complications or financial penalties. Keeping the IRS updated about responsible party changes ensures churches remain informed about their tax obligations and avoids unnecessary risks.

FAQs

What is Form 8822-B?
Form 8822-B is used to report changes in the responsible party or address for any entity with an EIN.
Who is considered a responsible party?
A responsible party is the individual who controls, manages, or directs the entity’s funds and assets.
What happens if Form 8822-B is not filed?
Failure to file may result in missed IRS communications, leading to fines or penalties for unresolved tax issues.
How soon must Form 8822-B be filed after a change?
It must be filed within 60 days of a change in the responsible party or address.

Church leaders should prioritize updating the IRS promptly to ensure compliance and maintain smooth operations.

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

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Internal Audit Guidelines for Churches

These internal audit guidelines are good for every church to monitor regularly.

Vonna Laue, CPA

Bio

Q: We have never had a CPA or firm come in to do an audit because of the expense. However, we believe it is in the best interest of the church to do quarterly audits. What are some guidelines we should use?

Here is a list of items for a full audit that may be helpful. Your board may want to select a few and do them on a rotating quarterly basis:

Review internal controls to make certain they are adequate.
Review expense reports of executive employees.
Review bank reconciliations.
Determine if investment statements agree to the general ledger.
Make sure there is support for the amounts recorded with accounts and notes receivable.
Review property, plant, and equipment (PPE) to verify additions and disposals have been recorded and depreciation is accurate. Even if you don’t operate on an accrual basis, you should still maintain an inventory of fixed assets for insurance and security purposes.
Review Accounts Payable and Accrued Expenses to determine all amounts incurred but not paid have been accrued.
Review revenue to make sure the donor system is reconciled to the general ledger.
Verify the church’s debt statement agrees with the general ledger.
Reconcile the church’s 941 reports with payroll expenses.
Analyze current year to prior year amounts of revenue and expense to see if there are any large or unexplained differences.

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Must We Comply with a Subpoena for Giving Records?

Six things to note when a legal request for information is made to the church.

Richard R. Hammar, Attorney, CPA

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Last Reviewed: January 24, 2025

Q: Our church received a subpoena requesting the donation records of someone in our congregation. The person is in a court case involving child support, and his ex-wife’s lawyer wants to see how much money he has been giving to the church to prove he’s making more than he says. Do we have to comply?

Are Church Records Privileged?

Church records are not inherently “privileged.” The term “privilege” or “privileged” refers to evidence that is not admissible in court because of some fundamental public policy. Records that are not privileged generally are subject to the subpoena power like any other organization. No state or federal law confers special “privileged” status on all church records.

There may be a very limited exception for notes created by a pastor that summarize the content of counseling sessions with parishioners if the sessions qualify for the clergy-penitent privilege under state law. In general, this means that the counseling consisted of confidential, spiritual counsel with the minister. But aside from this, neither the courts nor state or federal legislatures have recognized any generalized privilege for church records.

What About Subpoenas Issued by Other States?

A subpoena issued by a state court ordinarily is unenforceable outside the state, or in some cases the county, where it was issued. However, it is possible in some cases for a subpoena issued by a court in one state to be “processed” in another state. This requires additional work, and so many attorneys seek to avoid this step by attempting to have a church voluntarily respond to a subpoena that technically is not enforceable because it was issued by a court in another state.

Nearly 30 states have enacted the Uniform Interstate Depositions and Discovery Act, which allows subpoenas issued in one state to be enforceable in another, under some conditions. So, church leaders should not assume that a subpoena issued by a court in another state is not enforceable.

Does the Church Audit Procedures Act Apply?

The federal Church Audit Procedures Act allows church records to be subpoenaed under some circumstances. This demonstrates the absence of any general church records “privilege” and highlights that compliance with subpoenas may be required.

Consult Legal Counsel

If any doubts exist regarding a church’s legal obligation to respond to a subpoena, it is essential to consult with legal counsel. Legal professionals can provide guidance specific to the jurisdiction and the circumstances surrounding the subpoena.

FAQs

What is the Church Audit Procedures Act?

The Church Audit Procedures Act is a federal law that allows church records to be subpoenaed under specific circumstances, particularly in cases related to financial audits and compliance.

Are all church records subject to subpoena?

Yes, most church records are subject to subpoena unless they fall under a limited exception, such as the clergy-penitent privilege for counseling notes.

Can subpoenas from another state be enforced?

Subpoenas issued by a state court are generally not enforceable outside the issuing state unless processed through mechanisms like the Uniform Interstate Depositions and Discovery Act.

What should we do if unsure about compliance?

Consult with legal counsel to determine the appropriate course of action. They can assess whether the subpoena is enforceable and provide guidance on compliance.

For more detailed guidance, refer to the IRS resources or consult legal experts familiar with church-related cases.

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

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Should Ministers Prepare Their Own Tax Returns?

Discover whether ministers should prepare their taxes themselves or hire a professional, plus tips to avoid mistakes.

Richard R. Hammar, Attorney, CPA

Bio

Last Reviewed: January 9, 2025

Ministers can prepare their own tax returns. While ministers’ taxes include unique rules, they are not overly complex. Unfortunately, many people confuse uniqueness with complexity. With some effort, most ministers should be able to comprehend these rules sufficiently to prepare their own tax returns. Resources like the Church & Clergy Tax Guide and IRS Publication 17 (Your Federal Income Tax) provide essential guidance.

When Should Ministers Prepare Their Own Taxes?

Ministers who want to save on tax preparation fees may consider doing it themselves.
Unique rules for ministers’ taxes can be managed with proper resources and study.
For simpler cases, following trusted guides is often sufficient.

When to Hire a Professional

Some ministers may prefer hiring a professional tax preparer for convenience or confidence. If this is your choice, keep the following in mind:

Select someone with experience preparing ministers’ tax returns—ideally a tax attorney or CPA.
Share resources like the Church & Clergy Tax Guide to ensure accuracy.

What to Know Before Hiring a Tax Preparer

Consider these factors before deciding to have someone else prepare your taxes:

An IRS study found more than half of returns prepared by paid preparers contain errors.
Common mistakes include:
- Failing to claim the standard deduction.
- Entering incorrect amounts or filing with the wrong status.
- Filing unnecessary schedules, such as Schedule SE when earnings are below $400.
Paid preparers face penalties for filing returns with unreasonable positions, discouraging aggressive strategies.

Risks with Nonprofessional Preparers

Be cautious when working with nonprofessional or mail-order tax preparers. Avoid those who promise excessive tax savings or lack qualifications, like attorneys or CPAs. The IRS Return Preparer Program audits preparers who disregard federal tax laws.

Key Takeaways

Ministers can confidently prepare their own taxes using reliable resources.
If hiring a professional, ensure they are qualified and familiar with clergy-specific rules.
Avoid preparers who lack professional credentials or make unrealistic promises.

For comprehensive guidance, refer to the Church & Clergy Tax Guide.

FAQs

1. Can ministers deduct expenses if they prepare their own taxes?

Yes, ministers may deduct eligible expenses like resources or software used to prepare their taxes.

2. What are the risks of filing taxes without professional help?

While ministers can self-prepare, they must carefully follow clergy tax rules to avoid errors that may trigger audits or penalties.

3. Should a minister file taxes if they earn below $400?

Yes, ministers must still report earnings, even if their net self-employment income falls below $400.

4. Are mail-order tax preparers safe for clergy taxes?

No, it is best to work with licensed professionals, like CPAs or tax attorneys, experienced in clergy-specific tax rules.

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

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Understanding Minister Federal Income Tax Requirements

Explore essential details about minister federal income tax requirements, including common misunderstandings, penalties, and compliance tips.

Richard R. Hammar, Attorney, CPA

Bio

Last Reviewed: January 8, 2025

Ministers are not exempt from paying federal income taxes. Since 1943 (Murdock v. Pennsylvania, 319 U.S. 105), the United States Supreme Court has ruled that the First Amendment guarantee of religious freedom is not violated by subjecting ministers to federal income tax.

For more on this topic, see chapter 1 of Richard Hammar’s annual Church & Clergy Tax Guide.

Key Takeaways:

Ministers are subject to federal income tax on all income, including earnings from ministerial duties.
Exemptions from tax withholding do not equate to exemption from paying taxes.
Arguments claiming religious or legal exemptions from federal income tax have consistently been rejected by the courts.

Understanding Ministerial Income Tax Obligations

Ministers may mistakenly believe that certain exemptions from withholding mean they are exempt from paying taxes. This is not the case. One court ruling helps clarify this misunderstanding:

In Pomeroy v. Commissioner, 2003-2 USTC 50,568 (D. Nev. 2003), a federal court ruled that income received by ministers, whether from a church or private sources, is not exempt from federal income tax. The court noted:

Ministers’ income, even from religious activities, must be included in gross income for tax purposes.
The exemption from income tax withholding does not mean exemption from the obligation to pay income taxes.
A church’s tax-exempt status does not extend to the personal income of its ministers.

Common Frivolous Tax Arguments

Despite clear legal precedent, some tax protestors use religion or flawed legal interpretations to attempt to avoid paying taxes. The IRS and courts have consistently rejected these arguments, including:

The claim that the Sixteenth Amendment is invalid.
The idea that placing assets in offshore accounts or trusts eliminates tax liability.
The argument that filing a tax return is voluntary.
The assertion that Federal Reserve notes are not taxable income.

Congress has enacted penalties to discourage these arguments, including a $5,000 penalty for frivolous tax positions and a $25,000 penalty for maintaining frivolous arguments in Tax Court (IRC 6702, 6673).

The Corporation Sole Scam

One common tax scam involves promoting the use of “corporations sole” by churches and individuals to evade taxes. Promoters claim that structuring a church or individual as a corporation sole exempts them from tax and government regulation. These claims are false. Consider the following:

Only the presiding officer of a religious organization can form a corporation sole, not the church itself.
Corporation sole statutes clarify that these entities are subject to all government laws and regulations.
Incorporating as a corporation sole does not exempt a church from its obligations, such as withholding taxes, issuing W-2s, or filing IRS forms.

Example: Oregon’s corporation sole statute specifies that such entities are managed by a single director and have no board of directors, but this does not exempt them from tax compliance.

The IRS has issued warnings about the misuse of corporations sole (see Revenue Ruling 2004-27). Courts have consistently deemed arguments for tax exemption based on corporations sole as frivolous and imposed penalties on promoters and participants.

Ministers and Church Leaders: Stay Compliant

Ministers and church leaders should be cautious about tax scams and seek guidance from qualified professionals. Ensuring compliance with federal income tax laws protects both individual ministers and the church community from penalties and legal issues.

FAQs

Are ministers exempt from federal income taxes?
No, ministers are required to pay federal income taxes on all income, including earnings from ministerial duties.
Does tax withholding exemption mean no taxes are due?
No, exemption from withholding does not equate to exemption from paying taxes.
What is a corporation sole?
A corporation sole is a legal entity for religious leaders but does not exempt them or their church from tax obligations.
What should ministers do if they are unsure about tax compliance?
Consult a CPA or tax attorney for guidance on meeting federal tax requirements.

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

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Can a Church Revoke an Irrevocable Retirement Benefit Commitment?

Church boards may attempt to revoke irrevocable retirement benefits, but legal factors like consideration and detrimental reliance may impact enforceability.

Richard R. Hammar, Attorney, CPA

Bio

Q: When I retired as pastor, the church board took “irrevocable” action to provide full health coverage for my wife and me as long as we were alive. Recently I received a call from the current pastor stating that the board wants to cancel the health insurance benefits to my wife and me. The pastor stated that they are taking action because “they can change anything from past action.” Can an “irrevocable” commitment be changed?

Understanding the concept of ‘consideration’

A unilateral promise is revocable according to well-established legal principles. For example, a church board’s irrevocable promise to pay a pastor’s health insurance for life may in fact be revocable.

However, it is also well-established that unilateral promises can become irrevocable if they are supported by some form of “consideration.”

Consideration is a legal concept that means something of value.

To illustrate, X’s promise to provide a benefit to Y is unenforceable because X receives nothing of value (consideration) for his promise. X’s promise can become enforceable if he receives something of value from Y. Ordinarily this would be money or services. But, the courts also recognize some “exceptions” to the consideration requirement, which include “detrimental reliance.” That is, if X makes a unilateral promise to Y, and receives no consideration for it, that promise can become enforceable if Y relies to his detriment upon X’s promise.

In your case, it could be argued that your decision to forego salary increases was based on the church board’s irrevocable promise to provide health care coverage. Your detrimental reliance on the board’s promise could make that promise enforceable, even though the board received no consideration from you. Obviously, a definitive legal opinion in such cases depends on a full knowledge of all the surrounding facts and circumstances. Only an attorney apprised of all the facts would be able to provide a legal opinion.

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

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Funding Foreign Activities: What Churches Need to Know

Key considerations for churches conducting foreign missions, including tax compliance, grantmaking, and safeguarding funds for international outreach.

Frank Sommerville, Attorney, CPA

Bio

Last Reviewed: May 8, 2025

Foreign mission work offers churches powerful opportunities to expand their impact globally. However, these activities come with complex legal and tax requirements. Understanding the rules is essential for maintaining compliance and ensuring your mission’s success.

Key Areas to Understand

Tax-Deductible Contributions

Donors often want to claim tax deductions for gifts supporting foreign missions. To meet Internal Revenue Service (IRS) requirements, churches must:

Maintain full control over donated funds.
Use funds solely for charitable purposes.
Avoid acting as a conduit—don’t pass along designated gifts directly to individuals or foreign entities without oversight.

Example:
A gift specifically designated for a missionary is not tax-deductible unless the church retains discretion over how the funds are used.

To stay compliant:

Keep proper documentation.
Regularly review how funds are used.
Ensure clear policies are in place.

Short-Term Mission Trip Guidelines

Mission trip expenses are usually tax-deductible—if the trip’s primary purpose is charitable.

To qualify:

Expenses must directly relate to volunteer or ministry work.
Trips that include substantial personal pleasure or recreation may disqualify the deduction.
Churches must document:
- Detailed itineraries
- Dates and purposes of each day
- Expense breakdowns

Churches should clearly explain these rules to participants in advance to avoid misunderstandings.

Grantmaking to Foreign Organizations

When providing grants to foreign organizations, churches must ensure funds are used properly and legally.

Best practices include:

Vetting the foreign organization’s operations and governance.
Using written grant agreements outlining how funds will be used.
Requiring expenditure reports and documentation.
Seeking legal review or opinions when needed.

Maintaining oversight helps protect the church’s tax-exempt status and keeps donations tax-deductible.

Payments to Foreign Nationals

Churches must handle payments to foreign nationals with care, depending on where services are performed:

If services are provided in the U.S.:
- IRS withholding and reporting rules likely apply.
If services are provided outside the U.S.:
- Treat payments as grants.
- Ensure proper accountability and documentation.

Following IRS rules is critical to avoid penalties and protect both the church and the recipient.

Go it Alone or Partner with Others?

Among those involved with international ministry efforts, 58 percent partner with denominations or associations, 20 percent partner with other churches, and 18 percent go it alone.

The reasons so many churches go it alone vary:

Easy and affordable transportation and communication have made it possible for local churches to expand their reach to a global scale—an opportunity once only possible for the country’s largest congregations.

Many churches can now plan their own foreign missions activities or connect directly with individuals and international organizations, bypassing well-known missions organizations, including their own denominational agencies, to send teams, money, and resources.

They can also sponsor missionaries and charities based outside the country on their own.

But a word of caution: The do-it-yourself approach, while possibly efficient, may create unexpected oversights in the absence of the experience and knowledge offered by a missions organization or denominational agency. Like it or not, missions societies and denominational agencies are the best way to ensure compliance with these complex domestic and foreign laws. And, where support is provided to an organization abroad, these societies and agencies can often provide the on-the-ground verifications necessary to maintain compliance (for a cost well below what an individual church would have to spend to do the same).

Anti-Terrorism Compliance

U.S. anti-terrorism laws apply to all foreign mission activities. Churches must take steps to avoid inadvertently funding prohibited individuals or groups.

Key steps include:

Screening all transactions against government watch lists.
Filing required Treasury Department forms for any foreign bank accounts.
Staying up to date with Office of Foreign Assets Control (OFAC) regulations.

Warning:
Noncompliance can result in severe penalties, including criminal charges.

FAQs: Foreign Mission Activities

1. Can donations for foreign missions be tax-deductible?
Yes—if the church maintains control and discretion over the funds and uses them for charitable purposes.

2. Are personal expenses on mission trips deductible?
No. Only expenses for charitable activities are deductible. Costs for personal days must be excluded.

3. What documentation is needed for foreign grants?
Churches should use:

Written agreements
Detailed spending reports
Periodic reviews or audits

4. How do churches comply with anti-terrorism laws?

Screen all transactions against U.S. sanctions lists.
File the necessary forms for foreign financial accounts.

Final Tip

Foreign mission work is rewarding but legally complex. To stay compliant:

Stay current on IRS and federal regulations.

Work with legal and financial professionals.

Develop strong internal policies.

For additional guidance, consult legal and financial professionals familiar with the complexities of foreign mission activities.

We’ve used a combination of AI and human review to make this content easier to read and understand.

Frank Sommerville is both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

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A Gift Freely Given? Understanding the Concept of Undue Influence

Discover how church leaders can navigate undue influence claims in donations and safeguard gifts while upholding ethical standards.

Richard R. Hammar, Attorney, CPA

Bio

Last Reviewed: January 17, 2025

Gifts to churches by elderly members are common. With an estimated $40 trillion being transferred between generations, there is significant opportunity for charitable giving. However, some gifts are challenged by family members due to concerns over mental capacity or undue influence. This article examines these issues and offers guidance for church leaders.

What Is Undue Influence?

Undue influence occurs when a donor’s free will is compromised through force, coercion, or overpersuasion. This can invalidate a gift made to a church or charity. Family members may claim that the donor was coerced or mentally incapable, especially if substantial gifts are involved.

Key Factors Considered in Undue Influence Claims

Whether the gift was the result of hasty action.
If the gift was concealed from others.
Whether the beneficiary actively secured the gift.
If the gift aligns with the donor’s previous declarations and plans.
The donor’s age, physical condition, and mental health.
Whether a confidential relationship existed between the donor and recipient.
If the donor had independent legal advice.

Mental Capacity and Legal Considerations

To validate a gift, the donor must have sufficient mental capacity at the time of making it. This means understanding the natural recipients of their estate, their property, and forming a clear plan for its distribution.

Case Example: Curran v. Building Fund of United Church

This Vermont case highlights the legal complexities of undue influence. A testator amended their trust to include community organizations, including a church. Family members challenged the trust, citing mental incapacity and undue influence. The court upheld the trust amendment, citing evidence that the donor understood their decisions and acted of their own free will.

Guidance for Church Leaders

To reduce the risk of gifts being invalidated, church leaders can:

Ensure donors obtain independent legal advice when drafting wills or trusts.
Avoid situations where the church appears to coerce or influence decisions.
Document all communications with donors to demonstrate transparency.

Reducing Risk of Legal Challenges

Following these best practices can help safeguard the church’s reputation and ensure gifts are implemented as intended by donors. Independent counsel, especially from attorneys not affiliated with the church, is critical in these cases.

Conclusion

As the number of elderly donors increases, so do potential challenges to their gifts. Church leaders must be prepared to navigate these situations with care, ethical considerations, and legal compliance. By fostering transparency and securing independent legal advice for donors, churches can honor donor intentions while reducing the risk of undue influence claims.

FAQs

What is undue influence?

Undue influence involves coercion or manipulation that compromises a donor’s free will when making a gift.

How can churches avoid undue influence claims?

Churches can avoid claims by ensuring donors seek independent legal advice and avoiding involvement in drafting wills or trusts.

What happens if a gift is challenged in court?

If a gift is challenged, courts will examine the donor’s mental capacity, evidence of undue influence, and the circumstances surrounding the gift.

Are gifts from elderly donors more likely to be challenged?

Yes, gifts from elderly donors may be scrutinized more due to potential concerns over mental capacity or susceptibility to influence.

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

Proper Use of a Benevolence Fund for Church Member Assistance

Ensure your church’s benevolence fund is administered legally and effectively to help members in need without risking tax-exempt status.

Frank Sommerville, Attorney, CPA

Bio

Last Reviewed: January 24, 2025

Q: Recently, one of our member’s families lost their 15-year-old son. They contacted the church and asked if donations for the family could be handled through the church. We agreed and processed all donations received as cash exchange. Is this proper?

When a church is asked to handle donations for a family in need, ensuring the process complies with legal and tax regulations is essential. The following guidelines provide clarity on the best practices for administering a benevolence fund and avoiding potential pitfalls.

Key Considerations for Handling Donations

Direct Gifts: Individual believers may give up to $14,000 directly to another individual without gift tax consequences. These gifts are generally not taxable to the recipient and are not tax-deductible for the donor.
Church as a Conduit: If donors direct the church to pay funds to a specific family, these contributions are not tax-deductible. The church must not serve the private interests of the donors or recipients, as this violates federal tax-exempt purposes.

The Importance of a Benevolence Fund

To handle requests like these properly, churches should establish a benevolence fund. This fund ensures assistance is provided legally and aligns with the church’s tax-exempt purpose.

Steps to Create a Benevolence Fund

Adopt a Written Policy: The church’s governing body should define the following:
- A charitable class eligible for assistance (e.g., the poor, distressed, or ill).
- The types of needs the fund will cover (e.g., food, shelter, clothing, medical expenses).
- The documentation required for disbursement (e.g., applications, invoices, proof of financial need).
Encourage Donations: Solicit contributions to the benevolence fund without designating individual recipients.
Review Applications: Ensure recipients meet the criteria by reviewing their applications and supporting documents (e.g., bank statements, unpaid invoices).
Make Payments Directly: Payments should only cover documented expenses and align with the fund’s defined purposes.

Example of a Benevolence Fund in Action

Here’s how a benevolence fund could assist the family mentioned:

The family applies to the fund for funeral expense reimbursement.
The application includes the funeral home invoice and proof of financial need (e.g., recent bank statements).
The church’s benevolence committee reviews the request. If approved, the fund directly pays for the documented funeral expenses.

Potential Issues with Non-Compliant Donations

Private Benefit: Direct payments to individuals that exceed documented need or donor-directed contributions can jeopardize the church’s tax-exempt status.
Non-Deductible Contributions: Donors lose the tax deduction if they designate specific recipients rather than donating to the church’s general benevolence fund.

FAQs About Benevolence Funds

What is a benevolence fund?

A benevolence fund is a church-administered fund created to assist individuals in a defined charitable class, such as the poor, ill, or distressed.

Can donors designate a specific recipient?

No. Contributions must not be donor-directed to an individual; otherwise, they are not tax-deductible, and the church risks violating tax-exempt regulations.

What documentation is required for disbursements?

Applications must include proof of financial need and documentation of expenses, such as invoices or receipts.

How can the church avoid private benefit violations?

By ensuring the fund operates according to a written policy, disburses funds only for defined charitable purposes, and maintains control over contributions.

Conclusion

Administering a benevolence fund properly allows churches to help those in need while maintaining compliance with tax laws and preserving their tax-exempt status. By following these guidelines, churches can ensure their assistance aligns with both biblical principles and legal requirements.

For more information on benevolence programs, see Church Law & Tax.

Frank Sommerville is both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

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Maximizing Church Energy Efficiency: Cost-Saving Strategies for Sustainable Buildings

Improve your church’s energy efficiency with expert strategies to reduce costs and create a sustainable worship space.

Thomas G. Dolan

Bio

Last Reviewed: February 11, 2025

For church administrators, balancing church energy efficiency with upfront costs and long-term savings can be challenging. However, with proper planning and smart building strategies, churches can lower their energy consumption, reduce maintenance costs, and contribute to environmental sustainability.

Ensuring Proper Elevation for Moisture Control

Ground elevation plays a crucial role in energy efficiency and building durability. According to Albert R. Luper of Worship Concepts, “The ground elevation can almost never go too high. But it can go too low. If the ground elevation is too low you will always have moisture problems, which means rot and mold.” For large churches with concrete flooring, keeping floors at least 12 inches above grade ensures proper air circulation and moisture control. Luper says, “A wood floor should go 20 inches or higher above grade.”

Optimizing Insulation for Maximum Efficiency

Proper insulation is key to maintaining a comfortable indoor climate while minimizing energy costs. “You are always struggling with thermodynamics,” says Luper. Insulation should meet high R-value standards, such as R-19 for walls and R-22 or higher for advanced methods like Insulated Concrete Forms (ICF). In steel structures, insulation around metal sheeting is critical to preventing condensation and rust, ensuring long-term building integrity. Doug Mattox of Mattox Construction, Inc., adds, “Instead of placing the brick veneer directly next to metal sheeting, we recommend building a six-inch stud wall for the exterior wall and insulating it properly.”

Advancements in Concrete and Wall Construction

Modern techniques such as ICF and Concrete Form Masonry (CFM) improve insulation efficiency while maintaining durability. “This method is in the R-22 insulation range and is very efficient,” says Dale R. Yoder of Cornerstone Design Architects.

Energy-Efficient Roof Design

Churches with large structures benefit from steel trusses over wood due to durability and cost-effectiveness. Additionally, a “cool roof” design, incorporating heat-reflective pigments, helps reduce heat absorption, extending the roof’s lifespan and lowering cooling costs. Proper insulation, such as dense polystyrene boards, further enhances efficiency. Jim Peckham of VP Buildings notes, “You don’t need to worry about painting it for 20 years, and maintenance costs are considerably reduced.”

Windows and Daylight Optimization

Reflective insulated glass and daylight analysis strategies can maximize natural light while minimizing energy costs. “Look at the positioning of the building so you have glass east and west to take most advantage of natural lighting,” says Brady Eggleston of Century Builders.

Efficient Heating and Cooling Solutions

Heating, ventilation, and air conditioning (HVAC) systems significantly impact energy efficiency. Geoexchange systems, which use underground temperatures for heating and cooling, offer a sustainable alternative to traditional HVAC. “We do large churches and wind up zoning buildings—using a split system rather than a central plant for heating and cooling,” says Eggleston.

LED Lighting and Energy Management Systems

Upgrading to LED lighting reduces electricity use by up to 80%. Reflective ceiling colors and well-placed fixtures further enhance efficiency. Implementing an energy management system, ranging from basic programmable thermostats to automated Internet-based controls, optimizes energy use while reducing costs. “A moderately priced system might cost $15,000, but a really good control system that runs on the Internet can cost from $25,000 to $40,000,” says Luper.

Environmental Sustainability and Green Building Initiatives

The U.S. Green Building Council’s LEED certification promotes energy-efficient building standards. Many churches are adopting these guidelines to improve sustainability, reduce environmental impact, and ensure long-term savings. “There’s a huge effort in the United States for ‘green buildings,’ which are environmentally friendly and have a long-term sustainability,” says Peckham.

Cost-Saving Maintenance Tips

“You can spend a lot on an expensive roof, then cheapen it up with inexpensive flashing, which may look great but does not have the same life expectancy,” warns Luper.
Minimize roof penetrations to prevent leaks and structural damage.
Invest in high-quality exterior paints for long-term protection. “One of the things I often see in budgets is cheapening up on paints,” says Luper. “In my opinion, this is a big mistake.”
Use recessed metal mats at entrances to reduce dirt buildup and maintenance costs. “Every pound of dirt caught in them costs six dollars to remove, but six hundred dollars to remove if it gets into the carpet,” Luper adds.
Maintain proper attic ventilation to regulate indoor temperatures efficiently.
Choose high-thread-count carpets and durable flooring materials to extend their lifespan.

FAQs on Church Energy Efficiency

How can churches reduce energy costs?

Churches can lower energy expenses by upgrading insulation, using energy-efficient lighting, and optimizing HVAC systems with smart zoning controls.

What are the benefits of using LED lighting in churches?

LED lighting reduces electricity usage, lowers maintenance costs, and generates less heat, decreasing cooling demands.

Are there grants available for church energy efficiency improvements?

Yes, churches may qualify for federal and state energy grants. Visit energy.gov to explore funding options.

What role do solar panels play in church sustainability?

Solar panels reduce reliance on nonrenewable energy sources, providing long-term savings and environmental benefits.

By implementing these energy-efficient strategies, churches can reduce operational costs, improve sustainability, and create a more comfortable worship environment for their communities.

This article originally appeared in Your Church magazine. It has since been optimized to allow a better reading experience using artificial intelligence tools.

Managing Credit Card Transaction Fees for Church Donations

Understand how to manage credit card transaction fees for church donations effectively and ensure proper accounting practices.

Michael E. Batts, CPA

Bio

Last Reviewed: January 9, 2025

Q: We just began accepting credit card donations via a national processing service. We were told that the full amount of each contribution is tax deductible, even the portion that the service takes out for credit card processing fees.

Churches are increasingly accepting credit card donations, providing convenience for donors while raising questions about proper accounting practices. A common concern is whether the full donation amount, including the credit card transaction fees, is tax-deductible. Here’s what you need to know to manage these fees and maintain compliance.

Are Credit Card Fees Tax Deductible?

Yes, the full donation amount—including the portion deducted for credit card transaction fees—is considered tax-deductible for donors. This means your acknowledgment to the donor should reflect the full amount of their gift, even though the church does not receive the total amount after fees are deducted.

How to Record Credit Card Donations

The best practice for recording credit card donations is as follows:

Record the full donation amount as income.
Track the credit card processing fee as an operating expense.

For example, if a donor contributes $100 and the processing fee is $3, the church should record $100 in donation income and $3 in expenses. This approach accurately reflects the full donation while accounting for the expense of processing the transaction.

Should Credit Card Fees Be Recorded as Negative Contributions?

It is not advisable to record credit card fees as negative contributions. Doing so could complicate financial reporting and cause confusion during audits. Instead, treat these fees as operational costs necessary for accepting donations. This is similar to other bank service charges incurred by the church.

Tracking Credit Card Fees for Auditing Purposes

To ensure proper financial management and transparency, consider these tips for tracking credit card fees:

Set up a dedicated expense account for credit card processing fees in your accounting system.
Review monthly statements from your payment processor to reconcile fees accurately.
Provide clear documentation of fees and donation amounts during financial audits.

Conclusion

Managing credit card transaction fees for church donations requires careful accounting to ensure accuracy and compliance. By treating these fees as operating expenses and acknowledging the full donation amount for donors, churches can maintain financial transparency and build trust with their supporters.

FAQs About Credit Card Transaction Fees for Church Donations

1. Are credit card fees tax-deductible for donors?

Yes, donors can deduct the full amount of their contribution, even though a portion is used for transaction fees.

2. How should churches record credit card fees?

Churches should record the full donation amount as income and the transaction fees as an operating expense.

3. Is it acceptable to record fees as negative contributions?

No, recording fees as negative contributions is not recommended. It is more appropriate to categorize them as operational costs.

4. How can churches track credit card fees effectively?

Use a separate expense account in your accounting system and reconcile monthly statements to track fees accurately.

For further information on best practices for managing church donations, visit IRS Charities and Nonprofits.

Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.

Image: Douglas Sacha | Getty

What Churches Should Do with Nondeductible Donations

Best practices for handling nondeductible donations in churches to ensure compliance and donor transparency.

Richard R. Hammar, Attorney, CPA

Bio

Last Reviewed: January 24, 2025

Church treasurers often face situations where members attempt to contribute funds for specific individuals or families. These contributions may not qualify as tax-deductible. Here’s how to handle nondeductible donations effectively while ensuring compliance with IRS guidelines.

Four Options for Handling Nondeductible Donations

1. Refuse to Accept the Check

According to IRS Publication 3833, donations earmarked for specific individuals or families are not tax-deductible. In such cases, church treasurers should decline to accept the check. This avoids any misrepresentation of the contribution’s tax status.

2. Accept the Check and Stamp it “NONDEDUCTIBLE”

If the church decides to accept the check, stamp it “NONDEDUCTIBLE” in red ink on its face. This ensures the donor cannot use the canceled check to claim a charitable contribution deduction. Be sure not to include these funds in the donor’s contribution summary.

3. Mark Nondeductible Contributions in the Summary

Place an asterisk by nondeductible contributions in the donor’s summary. However, for contributions under $250, donors may still attempt to use canceled checks for deductions. Churches must remain vigilant in marking and tracking these transactions to avoid unintended deductions.

4. Avoid Honoring Every Donor Recommendation

Consistently honoring every donor “recommendation” about fund recipients may indicate the church lacks control over the funds. This undermines the contributions’ eligibility as charitable donations. According to the IRS, organizations must exercise full control and discretion over how donated funds are used.

Review Your Church’s Charter

If your church administers a benevolence fund, review its charter to ensure it includes “charitable” as well as “religious” purposes. Some legal precedents suggest that benevolence activities align more with charitable purposes than religious ones for tax purposes.

Determining Benevolence Eligibility

To determine if a recipient qualifies for benevolence assistance, consider the federal poverty guidelines published by the U.S. Department of Health and Human Services (HHS). While these guidelines are persuasive, they are not officially adopted by the IRS or courts as definitive criteria.

Tip: Learn more about establishing a benevolence program at your church by exploring Benevolence Fund Basics.

FAQs about Nondeductible Donations

What is a nondeductible donation?

A nondeductible donation is a contribution earmarked for a specific individual or family rather than for a church or charitable organization’s general purposes.

Can donors deduct earmarked contributions?

No. According to IRS guidelines, contributions earmarked for specific individuals are not tax-deductible.

Should churches refuse all nondeductible donations?

Churches may accept such donations but must ensure transparency by marking them as nondeductible and not including them in tax-deductible giving summaries.

How can churches ensure compliance with IRS rules?

Churches should establish written policies for benevolence funds, including criteria for eligibility and documentation requirements, to maintain compliance with tax regulations.

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

Image: AdobeStock/alexkich

Sample Benevolence Fund Policy For Churches

Use this sample benevolence fund policy for churches to establish a framework for benevolent programs and donations.

Richard R. Hammar, Attorney, CPA

Bio

Last Reviewed: January 16, 2025

[Church name], in the exercise of its religious and charitable purposes, has established a benevolence fund to assist persons in financial need.

The church welcomes contributions to the fund.

Donors are free to suggest beneficiaries of the fund or of their contributions to the fund. However, such suggestions shall be deemed advisory rather than mandatory in nature. The administration of the fund, including all disbursements, is subject to the exclusive control and discretion of the church board. The church board may consider suggested designations, but in no event is it bound in any way to honor them, since they are accepted only on the condition that they are merely nonbinding suggestions or recommendations. As a result, donors will not be entitled to a return of their designated contributions on the ground that the church failed to honor their designations.

Donors wishing to make contributions to the benevolence fund subject to these conditions may be able to deduct their contributions if they itemize their deductions on their federal income tax return. The church cannot guarantee this result and recommends that donors who want assurance that their contributions are deductible seek the advice of a tax attorney or CPA. Checks should be made payable to the church, with a notation that the funds are to be placed in the church benevolence fund.

[Board Name],
[Church Name]

This sample was taken from Richard Hammar’s annual Church & Clergy Tax Guide.

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

Image: AdobeStock/Kraiwit

Effective Benevolence Programs for Churches: A Guide to Success

Benevolence programs for churches: Best practices for effective and compliant support systems.

Elaine L. Sommerville, CPA

Bio

Last Reviewed: January 20, 2025

In churches and other nonprofits, benevolence programs are essential for meeting the needs of under-resourced individuals—those who cannot meet essential needs for themselves or their families. These programs stem from a church’s desire to do good, extend kindness, and provide charity to those in need. While most benevolence programs involve financial support, any resource-providing initiative falls under this category.

The Concept of a Charitable Class

For a benevolence program to align with a church’s tax-exempt status, it must serve a “charitable class.” This includes groups such as children, the elderly, or the underprivileged. Importantly, the class must be large or indefinite to avoid benefiting private interests. For instance, Private Letter Ruling 201205011 illustrates that programs serving small, specific groups—like a single family—do not meet the criteria.

Key Points:

If a program does not serve a valid charitable class, it likely does not meet the criteria for tax exemption.
Most benevolence programs aim to assist individuals experiencing financial hardships or unusual stressors.

Structuring a Benevolence Program

Successful benevolence programs are well-structured, ensuring both efficiency and compliance with exempt status requirements. According to IRS guidelines, a formal structure safeguards both church employees and the decision-making process.

Essential Elements:

Verification Process: Applicants should provide proof of need and belong to a charitable class.
Application and Documentation: Use forms to document the decision-making process, including proof of payment guidelines.
Policy Guidelines: Clearly outline approval processes, types of needs supported, and other requirements.
Tax Considerations: Payments to third parties may require reporting, such as Form 1099-NEC or Form 1099-MISC.

Example Policies:

Define approval authorities and limits.
Determine eligibility criteria for church members versus the community.
Prohibit linking benevolence to tithing records.

Special Considerations

Discretionary Funds

Discretionary funds used for benevolence must meet documentation requirements. Ministers should complete applications on behalf of recipients when necessary.

Repeat Requests

Churches should plan for long-term needs, such as chronic illnesses, by:

Obtaining board approval for extended assistance.
Reevaluating needs regularly.
Helping recipients explore other resources.

Designated Gifts

Churches cannot accept contributions earmarked for individuals. Instead, solicit donations for the benevolence fund to maintain compliance.

Employee Benevolence

According to Internal Revenue Code Section 102, benevolence for employees is taxable. Assistance for employees or their family members must be carefully documented and reported appropriately.

Exceptions Under IRC Section 139

During IRS-declared disasters, churches may offer tax-free assistance to employees and eligible family members.

FAQs About Benevolence Programs for Churches

What is a benevolence program? A program designed to provide financial or resource-based aid to those in need, operated within a church’s charitable guidelines. Are benevolence programs tax-exempt? Yes, if they serve a valid charitable class and comply with IRS regulations. Can churches accept designated gifts for individuals? No, donations must be directed to the benevolence fund, not specific individuals. Are benevolence payments taxable? They are not taxable to recipients unless the recipient is an employee of the church.

Benevolence programs provide essential support for individuals in need. By following structured policies and compliance guidelines, churches can maximize their impact while adhering to legal and ethical standards.

Elaine L. Sommerville is licensed as a certified public accountant by the State of Texas. She has worked in public accounting since 1985.

When Is a Holy Land Trip Taxable?

When Can a Trip Be Business-Related?

FAQs

1. Lead with the good news.

3. Don’t treat mistakes like sins.

4. Recognize the difference between laziness and risk-taking innovation.

5. Designate a good time and place to deal with problems.

6. Deal with private issues in private.

7. Approach correction as a learning experience, not a punishment.

8. Recognize and correct your own faults first.

Key Scenario: Tax-Deductible Mission Trips

Tax Consequences

Frequently Asked Questions

1. What qualifies a mission trip as tax-deductible?

2. Can participants deduct the cost of travel expenses?

3. What must be included in the church’s contribution statement?

4. What happens if a trip includes personal recreation?

Assessing the need

Setting policies

Ensuring compliance

The Introduction of Form 8822-B

Clarifying Form 8822-B Requirements

Why Compliance Matters

FAQs

Are Church Records Privileged?

What About Subpoenas Issued by Other States?

Does the Church Audit Procedures Act Apply?

Consult Legal Counsel

FAQs

What is the Church Audit Procedures Act?

Are all church records subject to subpoena?

Can subpoenas from another state be enforced?

What should we do if unsure about compliance?

When Should Ministers Prepare Their Own Taxes?

When to Hire a Professional

What to Know Before Hiring a Tax Preparer

Risks with Nonprofessional Preparers

Key Takeaways

FAQs

1. Can ministers deduct expenses if they prepare their own taxes?

2. What are the risks of filing taxes without professional help?

3. Should a minister file taxes if they earn below $400?

4. Are mail-order tax preparers safe for clergy taxes?

Understanding Ministerial Income Tax Obligations

Common Frivolous Tax Arguments

The Corporation Sole Scam

Ministers and Church Leaders: Stay Compliant

FAQs

Understanding the concept of ‘consideration’

Key Areas to Understand

Tax-Deductible Contributions

Short-Term Mission Trip Guidelines

Grantmaking to Foreign Organizations

Payments to Foreign Nationals

Go it Alone or Partner with Others?

The reasons so many churches go it alone vary:

Anti-Terrorism Compliance

FAQs: Foreign Mission Activities

Final Tip

What Is Undue Influence?

Key Factors Considered in Undue Influence Claims

Mental Capacity and Legal Considerations

Case Example: Curran v. Building Fund of United Church

Guidance for Church Leaders

Reducing Risk of Legal Challenges

Conclusion

FAQs

What is undue influence?

How can churches avoid undue influence claims?

What happens if a gift is challenged in court?

Are gifts from elderly donors more likely to be challenged?

Key Considerations for Handling Donations

The Importance of a Benevolence Fund

Steps to Create a Benevolence Fund

Example of a Benevolence Fund in Action

Potential Issues with Non-Compliant Donations

FAQs About Benevolence Funds

What is a benevolence fund?

Can donors designate a specific recipient?

What documentation is required for disbursements?