Transparency In Ministry

We receive several questions each year regarding designated or restricted contributions. Designated contributions are contributions made to a church or ministry for a specified purpose or program. The donor may designate a specific project or a specific individual relating to the contribution. Whether or not the contribution is deductible for income tax reporting depends on the type of designation and whether the Church has control and discretion over the contribution.

The following are several examples...

1. Donor Jones designates a contribution for the mission program of the Church. The Church has control and discretion over the contribution and the mission program supports the exempt purpose of the Church. This contribution is deductible.

2. Donor Brown designates a contribution for Student Smith for a mission trip. The Church has full administrative control and descretion over the contribution and the mission trip supports the exempt purpose of the Church. The contribution is deductible.

3. Donor Williams designates a contribution for John Doe. The contribution is not deductible.

4. Donor Smith designates a contribution for Student Smith a ski trip. Student Smith is Donor Smith's child. The contribution is not deductible, and resulted in a personal benefit to Student Smith. The ski trip does not support the exempt purpose of the Church.

The Church must have administrative control of the contribution and the related activity should support the exempt purpose of the Church.

Gifts that are designated by a donor for a specific person through a ministry are not allowed and could endanger the ministry’s tax-exempt purpose as well as enable the donor to break the law. These types of gifts are known as “earmarked” gifts. How can a ministry identify an earmarked gift? According to Dan Busby in FOCUS On Accountability there are three tests to identify these types of gifts.
1. Does the gift benefit an indefinite group? If a gift is restricted for one person, then it fails this test.
2. What are the donor’s intentions? The donor’s intentions must be to benefit the exempt purposes of the charity. It can’t be for the benefit of an individual.
3. How much control does the ministry have over the contribution? This test is key. The charity must use the funds to further its tax-exempt purposes. The charity must have full control of the funds and decide how the funds will be used.

Need clarification? Donors should not earmark contributions that the Entity has not previously established as a program or specific outreach of the ministry. If the Entity has established a designated individual or ministry that will receive support, then yes, the donor can designate the ministry or individual. To help eliminate the confusion, if a donor wishes to contribute to a specific ministry...call the Entity and inquire about specific outreaches and missions before the donation is given.

Contributions that are restricted based on the passage of time, should be recorded as “temporarily restricted” and then “released to unrestricted” when the passage of time has occurred. For example…a donor contributes $20,000 on 7/5/06 which is restricted to be used for medical benevolence as follows: $5,000 in 2006; $5,000 in 2007; $5,000 in 2008; $5,000 in 2009. How is the contribution recorded?

In 2006 – the church/ministry records the following:
DR Restricted cash $20,000
CR Temporarily restricted contributions – benevolence $20,000

DR Medical benevolence (when paid and amount) $5,000
CR Cash $5,000

DR Net assets released from restriction – TR fund $5,000
CR Net assets released from restriction – Unrestricted fund $5,000

In 2007:
DR Medical benevolence (when paid and amount) $5,000
CR Cash $5,000

DR Net assets released from restriction – TR fund $5,000
CR Net assets released from restriction – Unrestricted fund $5,000

In 2008:
DR Medical benevolence (when paid and amount) $5,000
CR Cash $5,000

DR Net assets released from restriction – TR fund $5,000
CR Net assets released from restriction – Unrestricted fund $5,000

In 2009:
DR Medical benevolence (when paid and amount) $5,000
CR Cash $5,000

DR Net assets released from restriction – TR fund $5,000
CR Net assets released from restriction – Unrestricted fund $5,000

Complications occur when multiple programs receive designated contributions. The ministry or church must follow the donor’s designations. If not…funds cannot be legitimately released and expended. Designations may be in writing or verbal. Documention of the donor’s intent is critical in maintaining financial integrity and an “audit trail”.