|While the subject of designated giving has some accounting implications, the matter of the use or lack of use of designated funds is essentially a legal matter. The following information is based on a review of IRS guidelines and associated literature. It is not to be construed or intended as legal advice. Just a few pointers:|
1. Where the IRS is concerned, as it relates to charitable contributions, a central matter is whether a contribution can be considered tax-deductible or not. If a contribution is made to a non-profit it is primarily considered tax-deductible ONLY if the receiving organization is given control of what the funds should be used for based on its overall mission, purpose and objectives. Hence, a tax-deductible contribution is considered such if the receiver is allowed to do what it wants with the gift within the mandate of the organization. Otherwise the ‘gift’ then becomes a conditional proposition to which there is no tax benefit allowed.
2. A contribution may still be considered tax deductible if the contribution is made to support a mission or a program which the organization directly and openly solicits funds. In this situation the organization is taking control of funds directed to what it wants to accomplish. Reference IRS code, §170.
3. The legality of designated contributions is primarily governed by state laws. Issues related to what can and cannot be done with designated funds is in the purview of the state. Different states have adjudicated differently on such matters. Nevertheless, the general consensus is that if a non-profit actively and openly solicits funds for a specific program, project, or mission, and a donor earmarks their contribution accordingly then the non-profit is obligated to honor that designation. However, if a donor identifies a line item to which they would like their contribution to go, and there is an absence of confirmation, or agreement, either verbally or in writing that the funds will be used accordingly, that contribution may be considered a suggested donation. As it stands, many churches recognize on their books an obligation to honor church members designations without agreement on the timing of when these funds will be used. This can make for ‘messy accounting’ in which the church generates ‘liabilities’ that it cannot get rid of until other competing priorities are funded.
4. Consequently, many churches are encouraged to have written policies regarding designated giving. Policies that stipulate what the church is willing to accept and under what conditions. Such policies should be made available to its members and also referenced on materials or platforms through which funds can be received. For example, a statement such as the following may be appropriate to have on a tithe envelope or under the giving section of the church’s website:
“The church will make every reasonable effort to honor designated gifts. However, according to IRS regulations, in order for a gift to be considered a tax deductible gift, the church must maintain full control over how the gift is used.”
Designated Giving: Properly Handling Restricted Funds, By Rollie Dimos, CIA, CISA, CFE
Rules for Designated Gifts. Frank Sommerville, JD, CPA
Are You Misappropriating Church Funds?
How to Handle Designated Funds
Donor Directed Funds
Ronald J. Shoemaker and Amy Henchey
Charitable Contributions, Publication 526, IRS