After Disaster: Understanding Designated Funds

By Raul Rivera

In the wake of the recent natural disasters to hit the United States, many are wondering what to do and how they can help. When we witness our neighbors and fellow citizens experience something so devastating, our hearts go out to them and we long to help.

With the wildfires out West and in Montana, and the numerous hurricanes that have hit various parts of the U.S., the need to help those affected by a natural disaster will only increase. The most practical way for people to help is by donating both cash and noncash items.

Many churches, ministries, and regular nonprofits are collecting nonperishable food items, bottled water, clothing, toiletries, and monetary donations to support other organizations that are working directly in the affected areas. 

Perhaps your church or ministry is doing the same or at least something similar. And while I applaud and support such efforts, there is a compliance aspect of collecting such donations that must be considered. 

For example, if an individual donates a large sum of money to your organization and designates it to go towards disaster relief efforts, is that amount of money tax deductible to the donor? What does your organization need to know about such donations? Is there a proper way for your organization to handle such donations?

To help address these questions, I want to provide you with five ways to properly handle designated donations. Implementing these five measures will help you to avoid misappropriating funds.

5 ways to properly handle designated donations

Below are 5 ways that will help you know how to properly handle designated donations while also avoiding the misappropriation of church funds.

1. Know the difference between designated and restricted donations.

1. Designated donation: when a donor notes and gives a desired intent for his/her donation. These are donations provided with a suggested use from the donor. Designated donations may be claimed as a tax-deductible donation by the donor. 
2. Restricted donation: when a donor gives with a required intent for his/her donation. In other words, a donor requires that his/her donation be used only for a specific purpose. Restricted donations are not tax deductible to the donor because the nonprofit organization does not have control over the use of the funds. 

The best way to handle donations depends upon how you solicit the donations and the donor’s intent when giving.

2. Understand the donor’s intent. 

The key in understanding whether a donation is considered designated or restricted, and therefore tax deductible or not tax deductible, is to determine the donor’s intent. 

The following is an excerpt from IRS PLR-200250029:

“The organization must have control and discretion over the contribution, unfettered by a commitment or understanding that the contribution would benefit a designated individual. Rev. Rul. 62-113. The donor’s intent must be to benefit the organization and not the individual recipient. Rev. Rul. 68-484.”

In essence, this means that in order for a donor to claim a tax deduction on a donation given to your organization, he/she must relinquish control and give your organization the ability to use the donation at its discretion. 

3. Inform your donors of the necessity to relinquish control of their donations in order to claim a tax deduction.

This can be done by adding certain language to your website or to any other means in which you receive donations. 

If you are a church, you can simply use the following language:

“This church is a qualified 501(c)(3) organization. All tithes, offerings, or donations of any kind are deductible under IRC section 170(c)(2). Unless otherwise noted and in accordance with IRS regulation, you agree to relinquish control of the donated funds to the discretion of this church.”

If you are a ministry or regular nonprofit, the statement above can be adjusted to read as follows:

“This organization is a qualified 501(c)(3) nonprofit. All donations of any kind are deductible under IRC section 170(c)(2). Unless otherwise noted and in accordance with IRS regulation, you agree to relinquish control of the donated funds to the discretion of this nonprofit organization.”

It is also best practice to inform a donor who restricts a donation to a specific use that his/her donation is considered a restricted donation and is not a tax-deductible contribution.

4. Clearly indicate whether or not a designated fund may be used for another purpose.

An easy mistake for nonprofits, churches, and ministries to make is by not informing donors when their restricted donations may be directed to other needs of the organization. 

When your donors are fully informed and aware of how their donations may be used, a certain bond and trust are built between your organization and its donors. This is an invaluable attribute for nonprofit charities.

5. If donations for a specific fund are no longer needed or the project is closed, notify the donor.

There may come a time when your organization receives a donation for a project that has been completed or terminated. What should you do in this instance?

In a situation like this, your organization has the responsibility of informing the donor that the fund no longer exists and then offer the donor one of two options.

1. Offer to redirect the donation: The first thing your organization needs to do is inform the donor that there is no longer a need for that specific fund or purpose. You should then ask if the donor would like to redirect his/her donation to the general fund or to help meet another need.
2. Offer to refund the donation: If the donor does not want to redirect the funds, your organization is under a legal obligation to offer a refund because it is a program that your organization set up and asked people to financially support. These funds are restricted and can only be used for their intended purpose.

If the donor wants a refund for a donation, it is important for your organization to send the refund with a letter explaining that if the donor already claimed a tax deduction, then he/she may need to amend his/her tax return using Form 1040X.

Simple steps that go a long way

By implementing what you learned from this article, you will be holding your organization to a high standard of financial integrity and stewardship that can only benefit your organization, donors, and those affected by natural disasters.

If you feel called to start an organization that brings relief to areas that have been affected by natural disasters, then we can help you. 

Please contact us today at 877-494-4655 and ask about our Disaster Relief CDC Package that includes a free expedited service (a $399 value), or you can click on the link below for more information. 

Recommended articles for you: 

• “How to Send Volunteers to Help with Relief Efforts”
• “6 Fundraising Ideas for Churches That Work”
• “Restricted Offering vs. Designated Offering”

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