How to Handle Year-End Donations, Part 1

By Raul Rivera

Pastor John was always amazed by what the holiday season yielded in his ministry. He loved seeing his congregation’s faith revived in remembering the gift of God’s only Son, Jesus. He was blessed by their desire to give in order to serve those who were facing trying circumstances.

But the increase in giving during this time of year always brought about very interesting results. This year would prove to be no different.

With Pastor John’s church located near the bayous of Louisiana, it came as no surprise that many of his congregants were resourceful when it came to donating to the church. Oftentimes, congregants would place jewelry, promissory notes, and other items in the offering plate. One member who operated a hobby farm had even dropped off a box of eggs at the church.

While Pastor John was thankful for their faithfulness to give, he was not always sure of how to properly handle such donations, and he wanted to serve his congregation well by properly managing what was given so that the donors could write them off on their taxes.

The uncommon becomes common

Although the story of Pastor John is fictional, it is not uncommon for many pastors to find themselves in a similar situation during the holiday season. Churches are often the recipients of generous acts of giving during this time of year. This increase in generosity can bring unexpected resources that are of great assistance to your church. But, as the current year ends and people prepare for the year ahead, they find themselves willing to part with all kinds of items that may end up donated to your church.

Some donations are easy to manage, but others, such as jewelry, rare antiques, animals, or cars, may be more difficult to utilize, depending on the needs of your ministry. Because churches receive donations in many different shapes and sizes during this time of year, I want to spend time addressing this matter in a 3-part blog series. I will use Pastor John and his experiences with different kinds of donations as an example throughout this series.

Part 1 of this series will address how to properly handle those unusual donations your church may receive. Part 2 of this series will address how your church should properly receive and handle donated vehicles that it may receive. And lastly, Part 3 of this series will address the large year-end offering that many churches receive. Then this blog series will culminate with a strategy for churches to implement in order to protect that which has been given.

Defining a non-cash donation

Over the life of your ministry, you may have noticed what I have noticed: members give in all shapes and sizes. Cash donations are the simplest to put to use, but non-cash donations can be more tricky.

Non-cash donations include anything given to your ministry that is not money. Some of the more common types of non-cash donations include cars, clothing, food, appliances, sound equipment, toys, and furnishings. However, stocks, mutual funds, and investments are also included in non-cash donations.

Because of the different types of donations that can be given, your church may find an immediate use for the donations; on the other hand, maybe your church receives donations that it is not able to use. What should your church do with donations that it is unable to use? One option is for your church to donate them to another ministry or charitable organization that could put them to good use.

Many of these unusable donations, however, may simply be “unusual” or “weird” and require special treatment. In this post, we will explore scenarios for unusual donations and how to properly handle them.

Every non-cash donation should be substantiated with a contemporaneous written acknowledgment stating the type of item received and how the donation will be used. This letter cannot assign a value to the donation, but must state the church’s intended use. In addition, non-cash donations valued at $500 or more require that the donor submit Form 8283 along with the donor’s annual tax return.

Unusual types of non-cash donations

What do you do if a donation comes to your church that is unusual or weird? What if someone donates a wedding ring, property with a restricted deed, a promissory note, or an incorrectly dated check? Because handling these types of donations can be tricky, I want to go over six unusual donation scenarios and show you how to handle them correctly.

Every non-cash donation should be substantiated with a contemporaneous written acknowledgment.

1. Wedding ring and other personal assets

Having counted numerous offerings for both small and large churches, I have seen quite a number of weird things placed in the offering. Whether it is a wedding ring, bracelets, car titles, or food, I have witnessed my fair of unique expressions of generosity. So, what does a church do? How do you give receipts for these?

Let us take a look at the following example:

A church in Florida received a $12,000.00 wedding ring in the offering, which was placed in an envelope with the name of the giver, who was a recent divorcee and saw it as an opportunity to lay on the altar a part of his past. What should the church do?

Any time the church receives a donation of personal property, section 170(f)(8) prohibits the church from estimating the fair market value of the item and writing a receipt for it. In order to comply with the law, the church can only give the donor a letter acknowledging the gift, fully describing it, and stating how the gift will help the church fulfill its mission and purpose.

2. Donations to a terminated project

On occasion your church may receive a donation for a project that has been terminated or completed. This is may be a cash or non-cash donation but may still pose an interesting dilemma for your church.

For example, take a ministry that specializes in helping churches in foreign countries create community centers. They work for a year in Mexico then move to assisting a ministry in Nicaragua the next year. Several months into establishing the community center in a Nicaraguan village, a donation of $10,000.00 comes in for the Mexico community center that the ministry is no longer supporting. What should that ministry do?

In a situation like this, the ministry has the responsibility of informing the donor that the fund no longer exists and offering to the donor one of two options.

1. Offer to redirect the donation: The first thing that the church needs to do is inform the donor that the fund was terminated and ask him if he would like to redirect the money to the general fund or to some other program.
2. Offer to refund the donation: If the donor does not want to redirect the funds, the church is under legal obligation to offer a refund because it is a program that the church set up and asked people to support. These funds are restricted and can only be used for their intended purpose.

If the donor wants a refund for the donation, it is important for the church to send the refund with a letter explaining that if the taxpayer claimed a tax deduction on his tax return, he may need to amend the tax return using Form 1040X.

The reason for this is to ensure that the church does not land in the pitfall of aiding and abetting a taxpayer to underreport income, under section 6701. This is a due diligence matter and should be a policy of the church when refunding a donation.

3. Remainder interest donation

Knowing that he only had a couple of years to live, an elderly man donated to the church his home, which sat on 12 acres of land. The only catch was that he wanted to live in it until his death. This is called a donation of remainder interest while the donor keeps what is called a life estate interest.

The church receives the property, but it does not take possession during the lifetime of the donor. Upon receiving such donation, title work is done by an attorney, and the church sends a letter to the donor thanking him for the donation. The letter needs to describe the actual property that was donated. The Ultimate Church Structure Conference manual has a sample copy of this letter.

To determine how much of a tax deduction the donor gets to take is not the responsibility of the church.

The sample letter reminds the donor to get with his tax preparer to discuss the tax benefit he will receive. The IRS publishes life estate tables under section 7520 that make it easy for the donor to determine what his deduction will be.

4. Unreimbursed expenses for services

Treasury Regulation 1.170A-1(g) allows a tax deduction for unreimbursed expenses that relate to services performed for the church. Similarly, the IRS allows a donor to deduct out-of-pocket transportation expenses necessarily incurred in performing donated services, and reasonable expenditures for meals and lodging necessarily incurred while away from home.

For example: Attorney John Doe does pro bono title work for the church's purchase of the new building. In donating the work, the firm incurred travel expenses of $175.00, plus recording and copy fees of $650.00. The attorney wanted to bless his church and absorbed the costs, but also wanted to be a good steward and write off the expenses on his taxes. What should the church do?

Using the sample letter in the Ultimate Church Structure Conference manual, take a few minutes and make some edits to the letter by thanking the attorney for donating the $175.00 in travel expenses, and for the recording and copy fees of $650.00. Keep in mind that because the attorney's donation exceeded $250.00, you must also follow the $250.00 receipt rules.

Keep in mind that donations of volunteered time are not tax-deductible, just the unreimbursed expenses incurred while volunteering services.

5. Checks with wrong date

A common occurrence every New Year is that the church receives tithes and offerings on the first Sunday of the year with checks dated for sometime in December. Many churches incorrectly allow the date on the check to determine the date for which the donor gets credit.

However, Treasury Regulation § 1.170A-1(b) says that "a contribution is made at the time delivery is effected." The regulation also allows for the date it was mailed. In order to conclude the date it was mailed, the church can guide itself by relying on the date of the postmark.

6. Promissory note

There are two types of promissory notes that I will cover.

Example 1:
Promissory note for property: Last year, a couple in Phoenix donated a promissory note for a business they sold in 2008. The balance due to the couple was $375,000.00. The promissory note indicated that over 6 years, the church would yield monthly payments of $5,866.94. This means that over the next 6 years, the church would receive a total of $422,419.68.

Is this type of donation tax-deductible? If so, how much of a tax deduction does the couple get to claim? Do they get to claim it all in the year they gave it, or do they get partial deductions for the 6 years of the promissory note?

The best short answer is that the couple gets to write off the fair market value of the note, which in this case is $375,000.00. Obviously, the note has to be tied to a lien on some assets worth at least that much.

Example 2:
Pledge: A church in Las Vegas starts a building campaign. The goal is to raise $75,000.00 in three years to build a new children's hall. A member of the church makes a pledge of $27,000.00. He wonders if he will be able to write off the entire amount of his pledge in this tax year. Going back to the tax regulation found in § 1.170A-1(a), only the amount " . . . actually paid during the taxable year is allowable as a deduction . . .".

The church can only give the donor a receipt for the actual amount of money he donated to the church, not how much he pledged.

Conclusion

Unusual donations do not have to be burdensome. As Pastor John learned, the gifts that come in unexpected ways may bring some of the greatest blessings for your ministry. However, be sure to use the proper avenues to make use of those donations so that they can be used (without issue) to further your purpose to minister to your community and beyond. This holiday season, pay special attention to what comes into your offering basket, and work to ensure that your team is equipped to handle whatever comes your way.

Stay tuned for Part 2 of this blog series when we see how Pastor John should properly handle donated vehicles that some prominent members gladly donated to the church.

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