One of the frequent questions we are asked from pastors and church administrators is how the church should record a love gift to an individual. It is not unusual for a church bookkeeper to call our office and relay a scenario similar to the following: “A guest speaker came to our church, and after the service, the pastor took him out and bought him a new suit. Can we record this as a benevolent gift?”
Oftentimes a church will make gifts of clothing, furniture, vacations or cash to employees and volunteer workers that are in addition to the person’s normal salary. These are often recorded by the church as “gifts,” or “benevolence,” instead of wages or payroll.
Sometimes a member of the congregation will approach the church and offer to donate an item, such as a vehicle, or cash to the pastor or other staff member. Of course, the church member wants the gift to go through the church so he can claim a tax deduction for his charitable gift.
In each of the above situations, many questions are raised as to how the gift should be recorded and whether it is proper for the church to make such a payment. It is common for churches to make benevolent gifts, but what determines whether the disbursement qualifies as benevolence? Why is the distinction so important? Does it really matter if the gift is recorded as benevolence or not?
Benevolence is defined as an act of kindness or generosity. Church benevolence programs are those that provide for the basic necessities of life to needy persons. This would include food, clothing, shelter, medical care and other types of assistance to the poor or destitute. A church can give cash to a needy person from the benevolence fund; however, as with all other benevolent gifts, the purpose of the funds must be to provide for the basic necessities of life. For example, a church could make a cash gift to a family who recently suffered a loss due to death or natural disaster. The family could then use the funds to pay for groceries, rent, transportation and other necessities.
The reason the classification of a gift as benevolence is so important is because benevolence is not taxable to the recipient. Normally, all other types of payments to individuals are some form of taxable compensation: wages, salary, honorariums, contract labor, payments for professional services, etc. Even gifts for birthdays, holidays, or special occasions are taxable if the value of the gift exceeds $25. Benevolence, however, is never taxable to the recipient because it is considered a charitable program of the church.
For this reason, the church must take steps to ensure that all benevolent gifts are made for only the basic necessities of life and only to those who are needy. Persons related to the church (employees, pastors, board members, and family members) should never be given benevolence payments. Those who control a tax exempt organization should never take tax-free money from the organization. All payments to employees, pastors, board members and members of their families should be treated as some type of taxable compensation.
We recommend that each church establish its own written benevolence policy. An appropriate policy would include the following:
1. Description of the purpose of the benevolence program (e.g. to provide support to the poor and needy).
2. Criteria to be used to determine whether a person qualifies to receive benevolent gifts (e.g. income limitations, distressed situation, loss of job, death in the family, etc.).
3. Identify employee or pastor of church who is responsible for approving benevolent gifts.
4. Identify amounts or types of gifts that can be made without approval from the board.
Whenever payments are made from the benevolence fund, the church should maintain documentation to show that the benevolence policy was followed. This can be accomplished through the use of a form that includes the following information:
1. Name and address of individual receiving benevolent gift.
2. The reason for the payment.
3. The relationship, if any, of the recipient to the church (i.e. are they related to individuals who control the church?).
4. Approval by person responsible for benevolence program.
Contributions Designated for Individuals
The church may receive contributions that are designated for the benevolence fund. The church then decides through its written benevolence policy to whom the benevolent gifts are made. It is important for the church to always decide to whom benevolence is given. Donors to the benevolence fund should never be able to direct their contribution to a certain individual.
For example, a church member may want to give his son a new car for his birthday. He would also like to claim a tax deduction for the new car. So he approaches his pastor with a check for $20,000 and says, “I want to make a contribution to the benevolence fund. Please designate it for my son—he needs a new car.” The church benevolence program becomes the conduit for passing through a gift to someone. This is an abuse of the church’s tax exempt status. Such a transaction could jeopardize the church’s tax exempt status.
Since churches are granted nonprofit status because of their charitable religious purpose, no individuals are allowed to personally benefit from the nonprofit status. Such personal benefit is referred to as personal inurement. The pass through of funds is one example of personal inurement. The donor who gave the $20,000 got to claim a tax deduction for a gift to the church, plus his son got a new car. He used the tax exempt status of the church for his personal benefit.
The New Suit
So how would we answer the question about the new suit that the pastor bought for the guest speaker? Since the guest speaker provided a service to the church (he spoke at a meeting), he is entitled to reasonable compensation for his services. Any payments or gifts as a result of providing these services should be considered taxable compensation to him. The new suit would not qualify as benevolence because it is a form of compensation and because the guest minister would probably not qualify as a needy individual under the benevolence policy. The value of the new suit should be recorded as an honorarium to the guest speaker. In the same manner, gifts valued over $25 to employees and volunteers should also be added to their taxable compensation.
Benevolence programs are provided to bless those in need. The intention should be to help the poor and distressed, which is one of the purposes of the local church. There are certain guidelines to be followed, but these should not discourage a church from participating in benevolence programs.