End of Year Donations: The Gift that Keeps on Giving?

Although the holidays are a time of rest for most, churches and non-profits often kick into over-drive during this season.  The last two months of the year are prime times to connect with donors and potential donors who only have until December 31st to give away money and claim a tax deduction.  As your organization enters the marketing fray, there are a few things to keep in mind so that after the dust settles, you won’t have any legal headaches waiting for you in the New Year.

I. Be clear in your marketing

No matter what people tell you, intention matters!  The IRS has spent countless pages of private rulings, revenue rulings, and code provisions reiterating that a tax deduction cannot be given or claimed if a donor gives a gift expecting some personal benefit.

“Personal benefit” can mean many things depending on the context, though it will almost always negate the charitable purpose and the accompanying tax deduction.  It can mean that a parent donates money to a non-profit school, expecting that the money will support the tuition payments for their two children who are currently enrolled at the school.  It can mean that a donor gives money to a seminary, expecting it to pay the salary of his nephew who works there as an adjunct professor.  It can even mean that a missions-minded church member runs donations through the church to help support a preacher he met in Africa during one of his trips.

One easy way to avoid the majority of these situations is to be clear in your advertising and marketing.  Emphasize stewardship, not simply filling up funding requirements.  The donor should be excited about supporting the mission that your organization or church is pursuing, not just the particular individual or organization that ultimately receives the money or the benefit of the mission.  When you ask for money, ask for people to support the actual work of your church or organization, not just to support a specific missionary or individual.

Be transparent about how you use the money to inspire trust and more donations.  Show your donors that although their money won’t get “funneled” directly to the missionary, that’s a good thing!  Share some details on where the money goes, such as planning efforts, supplies, plane tickets, security measures, etc.  Show your donors that you are invested in this mission and are dedicated to use their money wisely, including funding the participation of particular individuals.

Done well, marketing and soliciting donations will build relationships with your donors and will not only support the work and mission of the organization/church, but will also easily steer clear of creating expectations of personal benefit.

II. Have policies in place to protect how you use the money next year

Once you have received the money, how you use it depends not only on how you solicited it, but on what you have written down beforeyou even began soliciting funds.   For example, assume your church needed to raise $10,000 to send a new missionary, Sally, to the field.  Church members gave a total of $12,000 to this project.  If you don’t need to use the extra $2,000 for Sally’s trip, do you have to refund it?   Can you use it to send another missionary, Jack, to the same mission field?  Can you use it for a building project or simply save it?  Much of this depends on how you communicated it to your donors and whether you’ve documented your plans appropriately.

Receipt language.  Every receipt that a church or tax-exempt organization issues should contain IRS-approved language.  The standard language tells the donor that “no good or services were received in exchange for this donation,” and explains that it is tax-deductible.  But what many well-written receipts leave out is language that states that “while X organization will try to honor donor designations, X organization has discretion and control over the donated funds to use them for its exempt purposes.”  Having this language is a clear signal that the money solicited and receipted is under the organization’s control, not under the control of the donor.  It is paramount that this information be communicated to donors both before and after they give.

Sometimes, as in the hypothetical above, it is helpful to include even more explicit language.  For example, when it is possible for a donor to “over-give” to a project, make sure you notify them that “by contributing to this project, donors acknowledge that the church has full authority to apply contributions designated for this project to other purposes, in the event the project is canceled or oversubscribed.”  This language gives you flexibility to re-direct funds if a mission trip or a project is cancelled or postponed.

Refund or re-designation policy.  Even when your receipts give notice to all donors that the funds are for the organization’s exclusive use, some donors may ask for their donation to be refunded or returned.  In these cases, it is best to have a refund policy in place already, so that you can respond easily.  Refunding donations can be tricky, and usually requires the donor to relinquish part of their tax deduction.  Consult legal counsel if you’re planning on refunding donations on a regular basis, and especially if the amounts are significant.

In some instances where you have not included the proper control language, a donation can be considered to be held by the exempt organization “in trust” for use only in the designated purpose.  If this is the case for your donations, be sure to consult legal counsel when considering whether you may or may not need to refund the donations.

III. Have votes and agreements in place before you ask

A tax deduction is governed by two principles: donor intent (discussed above) and control by the exempt organization.  To meet the control element, the IRS often looks for a specific vote or some similar action by the governing body of the organization approving the raising and donating of funds to a specific project or individual.  Taking this step before any money is raised or sent to the ultimate recipient is essential, otherwise the vote may appear to be justifying the action retroactively.  This principle has several practical applications.

Sometimes a donor wants to give money to your organization to support a particular individual or ministry that is outside the work of the organization.  For example, imagine that an employee of a church wants to donate money to the church to help out another co-worker who is in financial need.  Similarly, perhaps a church member wants to support another persecuted believer in Africa by donating through the church.  If the church raises money for these projects and sends money to these projects without some decision that the projects are within the scope of the church’s exempt purpose, the church runs the risk of violating its tax-exempt status.

This principle also applies in the case of an exempt housing allowance for ministers.  The IRS requires that a housing allowance be designated by the church for a minister before the payments are made.^[1]  In fact, the IRS has denied a minister his housing allowance tax exemption when the church failed to show it authorized it each year and instead took retroactive votes to approve it.^[2]

The rule is simple: as needed, make sure that your organization votes to approve any fundraising projects before you solicit and receive money.  This will remove potential obstacles to distributing and documenting the money in the New Year.

IV. Keep track of presents to volunteers/staff at the end of the year

Christmas is usually a time when organizations thank their staff for the past years’ hard work.  This is an excellent practice, but must be done in consideration of the tax effect of these gifts, which can create unwanted headaches in the New Year if not preempted.

For employees, all bonuses and gifts (that are not so small as to make accounting unreasonable) are taxable to the employee and should be reported properly, both by the employee and the employer, as applicable.

For volunteers, gifts also have to be reported as income if, during the taxable year, the volunteer received $600 or more in compensation or gifts.  In that case, these amounts should be reported on IRS Form 1099.  However, if the gift is small enough that accounting for it is unreasonable or administratively impracticable, then it can be counted as a nontaxable “fringe” gift that does not need to be reported or counted towards the $600.  This exception does not apply to cash or cash equivalents like gift certificates, which are never nontaxable fringe gifts and will count towards the $600 limit.

Finally, none of these tips should be cause for anxiety or worry through the holiday season.  A tax-exempt entity is tasked with being a responsible steward of the funds it solicits and receives; ensuring that your legal “ducks” are in a row only increases your ability to steward well.  Moreover, as you increase in wise use of funds, donors will see and be motivated to partner with you in your mission.  So pursue fundraising with passion and wisdom this season!

Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel. Simms Showers LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum.  Please contact Robert Showers at hrs@simmsshowerslaw.com, or Daniel Hebda at djh@simmsshowerslaw.comfor specific legal advice on this issue for your needs. Simms Showers LLP © 2014

[1] 26 C.F.R. 1.107-1(b).[2] See Private Letter Ruling 8511075.