Guidelines for Benevolence Funds

by Carolyn
(Lancaster)

Benevolence Payments Taxable?

A fund was started for a sick child and
the contributions had her name on them.
What are the guidelines for distribution of the
funds received?

The father of the child works for the church.
Would any funds given to him become income?
(given to cover rent etc. for the family during
this time of illness.)

Vickey's reply

The donations would not be tax deductible to the donors because they were designated for an individual.

Most of the time benevolence payments are not taxable to the recipient; however it gets a little sticky when the recipient is a staff member.

Careful documentation is required to ensure that the employee would have received a benevolence payment, and in the same amount, if the individual had not been a staff member.

Know the answer? Face the same situation? Please post your answer or comment by using the "comment" link below. Thank you!

Comments for Guidelines for Benevolence Funds

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Benevolence to pastors
by: Anonymous

The pastors of the church are also the formal directors (and elders) of the non-profit corporation. The church does not have a separate board. If the pastor's have a benevolence need, does it go on their 1099 as taxable income?

Alan is Spot On!!!
by: Vickey

Wow, there is some valuable advice in this post!

Alan, thank you very much for taking the time to write such a detailed and informative post!

I know my readers appreciate it and I am excited that I will be able to point readers to this post for all the future questions I get on this subject.

Thank you to all of you that have contributed to this post!

Restrictions on donations for benevolence purposes
by: Alan

IRS regulations and guidelines are pretty clear that donations for benevolent uses must not be designated to a particular individual or organization if the donations are to be tax deductible for the donor.

Accepting donations given specifically for an individual creates so many complications that it is wise to return the donation to the individual without booking the donation.

Advise the donor that the correct procedure is to designate the donation to the church's benevolence fund.

It us totally up to the administrators of the benevolence fund how gifts will be given, to whom and under what conditions and for what purposes.

Donors can make suggestions to the fund administrators as to worthy recipients of assistance, but it is the administrators that have sole discretion about any disbursement of funds.

There are restrictions about making disbursements to officers, directors, administrators, staff members and employees (in short, to anyone with a direct connection to the church operations in pretty much any capacity.

Such disbursements, in most cases, are not tax free for the recipient, but are considered taxable income and must be reported on a 1099 form if the disbursement is $600 or greater.

Even if it is a lesser amount, the recipient must be notified that the disbursement is not tax deductible. This notification should be in writing and a record of the notification should be kept in case there is an audit.

For those who are not directly connected with the church, the donation is usually tax free provided it qualifies with the pre-established qualifying criteria for recipients and uses of disbursements.

There may be requirements for the recipient to demonstrate that the need is real. Generally, disbursements of appreciation or in exchange for services rendered may not be considered to be tax free disbursements. The rules are complex and intersect with requirements for reporting compensation for services rendered.

Do your due diligence (homework) before making a disbursement to avoid legal and tax trouble.

The consequences for violating legal and tax restrictions by tax exempt non-profit organizations can be severe.

Document Everything
by: Vickey

Very good post!

I love how you worded this:
Bottom line: document, document, document! If in doubt, seek competent counsel. God looks at the heart, the IRS looks at the paperwork.

That sums it all up in a nutshell!

Thank you!

Keep Good Records
by: CTM

While I am not an attorney, I have dealt with these situations and had to seek counsel. In the first case there are a couple variables that must be considered.

This is my understanding of how to handle this situation. For the gift to be deductible to the donor, the governing body of the church (board, elders,etc.) must verify the need and sanction the support as a mission of the church.

There should be a resolution adopted at a called meeting and it should be reflected in the minutes of the meeting.

This will allow donors to give to the church and direct the gift toward this cause.

While acts of benevolence are not generally taxable to the receiver, careful documentation is required.

It seems to be to the best interest of all involved if payment is made directly to the hospital or organization providing the service.

In situations where the recipient is an employee of the church, it can get sticky. Any compensation received that can be interpreted by the IRS as compensation for services delivered is considered taxable.

Therefore, you must document that the assistance is NOT in any way attached to his/her services to the church. IMPORTANT: if others have not received similar assistance for a need, or the amount given cannot be verified as a legitimate need, the IRS has the authority to disallow this as a benevolent act and deem the assistance as payment and therefore taxable.

Bottom line: document, document, document! If in doubt, seek competent counsel. God looks at the heart, the IRS looks at the paperwork.

PS. this author is not entering into giving legal advice.

benevolence
by: Tony

Also the IRS states that donations earmark for individuals cannot be deducted.

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Head Trustee/Board member/wife is paid employee

by Anna
(Shinnston, WV)

I would like to know if in this persons capacity as a Board member and the fact that his wife is our churches paid custodian, will a "gift" in any amount to him (in this instance, he was off work for two months due to health issues and without pay from his employer) to be taxable or non-taxable?

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Benevolence Guidelines
by: Vickey

This sounds like more like "benevolence" ... BUT...

Board members and their direct family members cannot receive benevolence from your church. The reason they are ineligible to receive any financial benefits from your church is spelled out in Treasury Regulation 53.4958-39(b). The IRS considers them disqualified persons due to their position of substantial influence in your tax-exempt organization.

Giving financial assistance to any "disqualified person" can be considered private inurement or excessive benefit transaction. Section 4958 of the Internal Revenue Code details the laws regarding the hefty penalty taxes that can occur when the IRS considers a tax-exempt organization to have committed one of the above mentioned transactions.

So sadly...I agree with the previous poster that this "gift" should be considered taxable income.

See more on benevolence here:

https://www.freechurchaccounting.com/benevolence-fund.html

"gift"
by: Anonymous

It is my understanding that regardless if the person(s) work or not, a 'gift' of any amount is still considered income and needs to be reported as such on a 1099 or on a W-2. If it is work as an independent contractor it's on a 1099, if it is an employee, it goes on the W-2.

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