DESIGNATED CONTRIBUTIONS TO CHARITABLE ORGANIZATIONS
By Dianne K. Briery, CPA
In my work with churches and other tax-exempt entities with their accounting, I often see some major issues with the accounting for designated contributions. In addition to accounting issues, people often want to designate the use of the contribution. That brings up some major issues: are such contributions deductible, and how should they be recorded in the organization’s accounting?
The deductibility will be addressed in this article, but the accounting will be addressed at a future time. In order for a contribution to be deductible, it must be made to a qualified charity AND used for the exempt purpose of that entity. A charity must maintain full control of all donated funds and use discretion as to their use. The funds must be used to carry out the organization’s exempt purpose, or they will not be deductible. Donors should be made aware that 1) the charity will make every effort to honor the contribution designation, 2) contributions are the property of the charity, and 3) the charity has the discretion to use ALL contributions in the best manner to carry out its functions and purposes.
In addition, the IRS has cautioned that for a designated contribution to be deductible, it must be in reality a gift to the charity—and not a gift to something else by using the charity as a conduit. The charity must have ownership of the donated property (or cash) and its rights of ownership must not be limited by conditions or restrictions which effectively make a private group the beneficiary of the donated property.
These rules apply whether it is for a specific purpose or a designated individual. Direct contributions to missionaries, or any other individual are not tax-deductible, even if they are for religious or charitable purposes. Problems arise when contributions are often made to a charity with a stipulation that the funds be distributed to a specified individual–i.e. love offerings, Christmas gifts, benevolence funds, missionaries. However, donors can designate the specific charitable activity to which they would wish their contribution to apply. Designating to a charitable activity instead of an individual presents no legal difficulties.
To ensure the deductibility of the contribution, a donor should be able to show that the charity retained control over the funds and maintained discretion as to their use. Tax-exempt organizations can provide that documentation to donors with periodic bulletin inserts, blanket statements on offering envelopes, or disclosure on website. Again, if a donation is earmarked to an individual and the charity exercises NO control or discretion over the use, the donation is treated as a gift to the designated individual and is NOT deductible as a charitable contribution.
There are many specific circumstances and court cases. If you have questions in regard to these issues, please consult with me or other tax or legal professional who has experience with these matters.