Churches, like all nonprofit organizations, rely upon monetary donations in order to carry out their basic functions. In particular, it is these donations that enable the church to literally keep its lights on. Similar to the article about members taking deductions for the donations they contribute; this article focuses on what the church may do with the funds it receives. Please note that this article does not address fundraising through Bingo or Raffles.
In most instances, a member simply donates funds to be used towards the general operations on the church. In other words, these funds are to be uses for the operational cost of the church, such as utilities and salaries.
In most instances, once a donor has made a monetary donation, those funds become the property of the church and is free to use those funds without the donor’s authority as to how they are spent, unless they are given for a specific, designated, or restricted purpose. The reason that a donation to your church is tax deductible is because it is considered an irrevocable gift to a charity by the Internal Revenue Service. However, if the donor does not want a tax deduction for the gift, the church is governed solely by state law.
Unlike unrestricted funds, a donation which is received for a particular purpose, may only be used for that particular purpose. However, this restriction may be temporary or permanent. The important thing to remember is that only the donor of those funds can make the determination as to whether or not those funds are unrestricted.
By way of an example, if a check is given to the church without any notation or memo, those funds can reasonably be considered unrestricted. However, if the check contains a notation or is included along with a cover letter that states that the funds to be used for a new roof on the church, then that’s how those funds are to be spent.
Once the check has been accepted, by depositing it into the church bank account, you need to consider your options in regard to putting a new roof on the church. Spending any portion of those funds for anything other than a new roof would at a minimum constitute breach of fiduciary duty and fraud.
- What if the church already has a new roof?
- You may either return the check to the donor;
- Ask the donor if they would consider donating those funds for another purpose, (you can ask the donor to write the phrase, “Suggested for” on the check’s memo line in front of “new roof.” That way the church is not legally bound to install a new roof;
- Or save those funds for the inevitable new roof at some point in the future.
- What if there is a surplus after the roof has been completed?
- In order to use any surplus funds after the new roof has been installed, the church must obtain written permission from the donors to direct those funds elsewhere.
Determining the nature of the Donation:
Under state law, one must first determine whether the church, or the donor, imposed the designation. The church may only remove designations in three ways: (1) with the written permission of the donor(s), (2) by court order, or (3) with the permission of the state Attorney General. If the designation is imposed by the church on itself, then it is bound to that designation. The church may remove that designation only by utilizing one of the three methods above.
Borrowing from Restricted Funds:
Following the example from above, the church may elect to simply retain the funds designated for a new roof which will likely be needed several years from now. As often happens, some unforeseen expense arises where the only available funds are those mentioned above. Although tempting, regardless of the need or good intentions of the church would be illegal and considered fraudulent. The best solution would be to contact the donor and request written permission to modify or change the original designation of the donation for the new roof to meet the current need of the church. However, at that point, the donor may request that the funds either be used for a new roof, or returned.
Your church should adopt a written policy to handling designated gifts to the church. Within reason, the policy should state that the church board may remove any restrictions on gifts when it is in the best interest of the church to do so and should be included in all donation/fundraising documents, including gift receipts.
In doing so, the church would then be able to vote on the spending the surplus after the new roof was installed. This would also be an effective tool when the donor has passed away or cannot be located in order to modify a restricted donation.
A restricted gift is just that, and if spent inappropriately can result in legal action against your church by either the donor, or the Attorney General. In addition to returning the gift, the church may be found liable for punitive damages and attorney’s fees.
Church Officer and Director Liability
Deductible Donations for Congregation Members
California Attorney General
Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.