If contributions are designated to specific individuals, no deduction ordinarily is allowed unless the church exercises full administrative control over the donated funds to ensure that they are being spent in furtherance of the church’s exempt purposes. This rule is quite complicated and requires careful scrutiny by the church treasurer and other responsible parties. Simply attempting to funnel a personal gift to an individual (whether clergy or not) through the church books to obtain a tax deduction is not legally valid.
Of course, designated giving for missions or the church’s building program, for example, is appropriate. The problem arises when the donor tries to use the church as a funnel through which he or she makes a gift to a designated individual, regardless of how needy or worthy the recipient may be. The church treasurer will encounter this issue when the donor approaches him or her and states that they want to help a particular person in the church, possibly even the pastor. The donor’s intention is to make a donation to the church that is in turn passed on to the intended recipient. The donor often wants to make the gift through the church so that he or she can claim a tax deduction for the gift. Unless the donor is fully aware that the church can redirect the “gift” to other needs and accepts that fact, the “gift” should not be accepted. While the church governing body may very well agree to fund the intended need specified by the donor, the church must exercise complete control over the gift to ensure that the gift is properly taken and disbursed.
Taxation of Designated Gifts
Any designated gift that passes through the church becomes taxable to the recipient. This issue often arises when the church decides to help a person or family in need. The most likely response is to take an offering for the person, allowing the donors to make their checks payable to the local church, with the church then presenting one church check to the intended recipient. Even though this effort was intended to be a benevolent gift to the recipient, it becomes a taxable gift. There is a possibility that the taxation issue can be overcome if the church official receiving the offering advises the potential donors to make their checks payable to the intended recipient and specifically states that the gifts will not pass through the church’s books and therefore will not be eligible as a charitable deduction.
A simple rule of thumb is if a person has reason to believe that they can claim their gift as a charitable deduction, it is taxable to the recipient. This idea is discussed at length in The Church Treasurer’s Manual under Reportable Income for the Minister available on our website.