When is a Charitable Contribution Deductible?

Steve Boersma, Ph.D., CFO 

Not all contributions are created equal under the tax code. While Sunday morning offerings and gifts are almost always tax deductible, gifts that come with restrictions or specific designations may not be legally deductible or receipted as such by the church. Likewise, sometimes payment received from a member for something that looks like a service (i.e. participation in an event), can actually be treated as a tax-deductible donation if set up correctly. So when is a contribution really a contribution?

Section 170 of the Internal Revenue Code says a church can only treat charitable contributions or gifts as tax deductible when they are made "...to or for the use of" entities organized under section 501(c)(3) of the tax code and whose tax exempt status is currently active and in good standing.

In looking to determine whether a contribution has been made "to or for the use of" a qualified charity the IRS will consider the following three factors:

  1. Is the gift intended to benefit the organization?
  2. Does the organization have full control of the gift?
  3. Is the organization able to exercise full discretion over how the funds are ultimately to be used?

A church is expected to use donated funds to further its own exempt purpose. This can be anything from paying a utility bill, to funding a church program, to supporting missionaries, or even paying staff.

The test of control is most often demonstrated by the actual receipt of the funds and their deposit into the church bank account. But can also be accomplished in other ways (i.e. the transfer of a stock gift into a brokerage account held in the name of the church, or a registered grant deed indicating the transfer of real property to the church, etc.). Most IRS challenges to the deductibility of a contribution will hinge upon the control factor. The most compelling evidence of control is affirmative action by the church board over the budget process and financial policies that control how funds will be received and spent. This is especially important when funds come with a restriction on their use.

The exercise of discretion as to their use looks at the question of who has the ability to make the final decision as to how the funds are to be used. A church is expected to only accept and use donated funds to further its own exempt purpose. Thus, the IRS will look to see whether real oversight was maintained by the church in accepting the giver.  A church is allowed to accept gifts that come with restriction and often does for such things as their benevolence fund, or a new building project. However, to be treated as a tax-deductible gift the restriction must be limited to something that benefit the church and come with the understanding that the final say in how the funds will be used rests with the church and not the donor. Thus, where a sufficient degree of control is exercised by the charity, any designation by a donor will be viewed as a mere expression of the donor's wishes rather than a private limitation upon the charity's use of the funds.

In summary, church should be careful before granting a tax deductible receipt to a donor to ensure that the "gift" meets the IRS deductibility test. Failure to do so could both jeopardize the deductibility of the gift and the tax exempt status of the church.