It is not unusual for a donor to request that their donation be used for a specific church program or initiative like a building fund or a mission trip. And in order for that donation to be tax-deductible to the donor, the gift must be made to the ministry itself or a specific program, instead of an individual.
Ministry leaders have specific responsibilities to comply with donor restrictions, ethical practices, and generally accepted accounting principles when it comes to donor-restricted donations, and should keep these considerations in mind:
- Assets must be used and accounted for in accordance with the purpose for which the gift was given.
- Gifts must be under the control of the ministry.
- Soliciting designated gifts must be done with caution to avoid jeopardizing the church’s tax-exempt status.
- Churches should establish a written policy governing designated or restricted gifts that distinguishes between church-created restrictions and donor-created restrictions.
- Restrictions that would provide substantial benefits to the donor or the donor’s family members are unethical and could entangle the church in a donor’s unlawful activities, such as tax evasion or even money laundering.
- Gifts that are conditioned upon factors that are plainly biased and unenforceable should be refused.
- Churches should encourage the use of suggested donations instead of legally binding designations or restrictions.
Failure to fully comply with a donor’s gift conditions can have serious consequences for a church, including undermined donor confidence and requests for gifts to be returned. While donor-restricted gifts should only be used for the specific purpose for which they were intended, circumstances sometimes arise that make that impossible.
For example, if a church receives a gift specifically intended for a building project and that project is later canceled, the church may wish to remove the restriction from the donated funds. This can usually be accomplished by getting permission from the donor to remove the restriction or by petitioning a court to do so if the original donor is deceased or cannot be found.
Every church can benefit from adopting clear policies for dealing with gift restrictions. At a minimum, the choice of whether to accept a restriction should be made by ministry leadership and only after adequate due diligence. Each organization will need to tailor its policies to its own circumstances, taking into account its governance requirements, potential donor pool, and other factors.
The Church Law Center of California advises churches and other nonprofits on how to protect themselves from risk while furthering their mission. Call us today at (949) 245-3177 or reach out to us through our contact page.