Understanding Love Gifts: Tax Rules and Best Practices for Churches

Christ commands us to love one another. Since the church follows his commands, the church wants to express that love, usually by blessing someone with a love gift. Frequently, the church will receive a love offering for someone in need or in appreciation of a member.

The Internal Revenue Service does not mind love gifts as long as the church follows the tax rules.

In all instances, the church must approve the love gift and take control of the contributions. For example, if Ms. Myway wants to bless Pastor Loving by giving him a love gift through the church, then the church should not accept that gift. Ms. Myway is controlling how the money is spent. On the other hand, if the church decides to bless Pastor Loving with a love gift, it may accept the donation from Ms. Myway. If the church controls how the money is spent, then the donation qualifies for charitable contribution credit. On the other hand, if Ms. Myway is using the church as a conduit to give a personal gift to Pastor Loving, then she does not have a tax-deductible contribution and the church has risked its tax-exempt status.

The church may give love gifts in four circumstances: (1) to meet a benevolent need, (2) to compensate a visiting minister, (3) to compensate an employee, or (4) to bless a ministry. Each type of gift has rules that are specific to that type.

Benevolent love gifts have two characteristics: (1) the recipient has a need, and (2) the recipient cannot presently meet that need. The IRS has avoided defining “need,” preferring to allow the courts to define the term. Since no court has defined it so far, churches should use the common, everyday meaning of “need.” Generally, “need” is a synonym for “necessity.” As a result, the church should only meet needs that represent a necessity for the recipient. Most commentators believe a need should relate to food, shelter, clothing, transportation or health care items. The church must document these two elements in writing. The documentation is intuitive: the church must confirm the need and the lack of resources.

For example, if a family cannot pay the rent, the church may call the landlord and confirm the rent has not been paid. The person making the call writes a memo to be filed, documenting the conversation. The church then secures a written statement from someone who is knowledgeable about the family’s finances that the family does not have the money to pay the rent. Many churches find a written application helpful in documenting benevolent requests.

Assuming the church properly documents the factors described above, no tax reporting is required unless the recipient is an employee. Benevolent gifts must be limited to the amount of the need. Sometimes, the love offering will exceed the amount of the need. To solve this problem, the church should notify donors through the benevolence committee (or other governing body) that any excess amounts received above the designated amount will be transferred to the church’s general benevolence fund.

All love gifts to visiting ministers and missionaries are taxable and should be reported to the IRS on Form in Box 1 on Form 1099-NEC, unless the church designates a portion of the payments as housing allowance. The church should not report the amount designated as housing allowance to the IRS as taxable income.

All love gifts are taxable to the employee, even if it meets the requirements to be a benevolent gift described above. However, this is not the end of the analysis. The church has responsibility to assure that an employee does not receive more than a reasonable amount of compensation through a non-benevolent love gift. For example, if a church took a love gift on pastor appreciation Sunday and a donor placed a check for $1 million dollars in the gift offering. The church should not give the entire offering to the pastor because it may cause his compensation to exceed a reasonable amount. This could cause the church to lose its tax-exempt status. It could also cause the pastor to owe an intermediation sanction up to 200 percent of the amount his compensation exceeded a reasonable amount.

To solve this problem, the church should notify donors that the personnel committee (or other governing body) has set a maximum amount that will be given to the pastor from the love offering. The church should also tell them if any amounts are received above the designated amount, the excess amounts will be transferred to the church’s general fund.

Frequently, the church will want to assist another ministry. This ministry may be the employer of a guest speaker or missionary. At other times, the ministry will perform a charitable or religious service in the community. Benevolent gifts would still need to be limited to the amount of the need.

The church should first determine whether the IRS recognizes the ministry as a tax-exempt organization. Before the church receives a love offering for a ministry, it must have written confirmation of its tax-exempt status. Typically, the ministry would provide the church with a copy of their IRS determination letter. After confirming the ministry’s tax-exempt status, the church may pay the ministry a love gift without any restrictions.

If the ministry is not recognized as tax exempt or is unable to present written proof of its tax- exempt status, then the church may not give it a love gift. Instead, it may only pay for services rendered. Like employees, the amount is limited to a reasonable amount for the services rendered to the church.