Benevolence funds are established with the purpose of caring and providing for members of the community in need. These funds often help people pay for living expenses such as rent, utilities, and groceries. For churches and Christian nonprofits, following Jesus’ example of benevolence is a worthy goal that inspires great generosity. This is to be encouraged and celebrated!
However, what often goes unnoticed are the IRS guidelines that stipulate the tracking, use, and recording of benevolence funds.
Unfortunately, these acts of compassion often put organizations in non-compliance with tax regulations, exposing them to potential sanctions imposed by the IRS.
This subject is too broad to cover fully in this article, but we want to share five common mistakes we see nonprofits make with benevolent giving. We’ll also give you practical steps you can take to avoid them so you can be compassionate and compliant at the same time!
1. No Written Policy for Managing Benevolence Funds
Structure is vital to ensuring benevolence funds are managed and disbursed properly. A written policy should provide the processes, qualifications, and decision-making process for disbursing funds.
Good policy will also protect the organization and its employees from being caught in the crossfire of a benevolence-related conflict. Also, in the event of an IRS audit, a written policy that the organization is following can document the charitable use of funds.
A good policy should outline the qualifications that must be met for funds to be disbursed and describe what’s required to demonstrate need. Your policy must address several items including:
- Proof of Hardship – The organization must be able to verify the person does not have the resources to meet their need by their own means. The policy should determine what documentation should be received and saved to substantiate that an individual is facing hardship, such as bank statements, past due bills, and even references within the church or organization.
- Cap on Gift – In many cases, the financial need requests received from a community exceed the benevolence funds available to meet those needs. Having a maximum gift and a frequency policy often takes pressure off the decision makers who are trying to consistently benefit the greatest number of people in need with limited funds.
- For example, the policy can state that gifts cannot exceed $500 and the recipients can receive these funds once every six months.
- Decision Makers – A good written policy will address who has the authority to approve fund disbursements and at what amount. Benevolence committees are discussed in more detail below.
- Guidelines for Long-Term Need – Benevolence is typically reserved for short-term emergencies, however there may be certain situations in which the recipient may require long-term assistance.
- For example, a person may experience chronic illness or may need to take care of a loved one who is ill and cannot work for an extended period. The policy should address specific situations when long-term assistance can be approved, for what duration, and the frequency of re-evaluations.
- If a long-term need arises, the church may also want to explore other resources available through the government, community programs, and other nonprofits.
- Other – There are several other questions you may want the policy to address, depending on the church’s strategy, such as:
- How will the funds be disbursed: cash, fund transfers, payment to landlord/bank directly, or gift cards?
- Are benevolence funds reserved only for church members or are they available to the community?
- Are there any situations that may disqualify an applicant from receiving funds?
2. Donors Give to Benevolence Funds with Strings Attached
Although it may sound appealing to award funds with conditions such as an agreement requiring the recipient to volunteer at the organization, if funds are given in exchange for work done, nontaxable gifts may be converted into taxable compensation.
For this reason, if it becomes apparent that goods or services are being exchanged for benevolence funds, be sure to carefully examine the situation to consider proper reporting. You may also need to consult your tax advisor regarding compensation reporting that may be required by the IRS.
Additionally, be careful when looking at giving records when determining use of benevolence funds.
3. There’s an Unlevel Playing Field for Applicants
Nonprofits and churches are often made up of close relationships among its members. When a member is in financial need, it is compelling to help the people you know best or prefer. But when it comes to giving of benevolence funds, be careful to remain objective and follow the benevolence policies in place. Here are several tips and recommendations to set your mind at ease.
Define your charitable classes
In deciding who is eligible to receive benevolence, the aid must be distributed to a large charitable class of potential beneficiaries. Charitable classes should include large groups of people in need and are broadly defined to avoid benefiting private interests or pre-selected individuals. Examples of charitable classes may include the economically challenged, elderly, physically/mentally ill, homeless, and those affected by natural disaster.
In order to document equal opportunity, anyone should be able to apply and selections should be made on an objective basis.
Establish a decision-making board
Decisions should ideally be made by a board consisting of three or more unbiased decision-makers who are not related to those seeking assistance. The goal of this board is to disburse funds objectively to help ensure unbiased decisions are made.
Avoid “exceptions” to the rule
It is best to remain objective and not allow relationships with those in need dictate decisions made by the benevolence committee. Consider documenting the following criteria:
- A complete description of the assistance
- The purpose of the aid
- The required steps to disburse assistance
- How the recipient was selected
- Relationship to any officers, employees or large contributors
Recommended Process: Application
The organization should consider a written application for prospective recipients to complete. This can help the benevolence committee remain objective when considering candidates since they are receiving the same type of information from each candidate from which to base a decision. We recommend documenting the decision-making process to verify compliance with the benevolence policy and saving these records for 7 years.
4. Employees Receive Benevolence Funds
Giving nontaxable benevolence funds to employees is generally not allowed by the Internal Revenue Code section 102(c). However, if an employee is part of a large charitable class, they may be eligible. See #3 Unlevel Playing Field above for more information regarding charitable classes.
Benevolence given to employees is generally considered taxable wages and is typically included on the employee’s W-2. For exceptions to this rule, please consult your tax advisor.
In order to ensure proper use and documentation of funds, benevolence given to employees or their family members should be approved and carefully documented by the benevolence committee. Granting benevolence funds to employees should also be addressed in the written policy, to aid the church in consistent decision-making before personal emotions and relationships create bias and influence decisions.
5. Gifts are Earmarked for Certain Individuals
Donors directing their gifts to individuals is not illegal, however such gifts are non-deductible for tax purposes to the donor. If the nonprofit accepts funds designated for an individual or family, they should notify the donor that their contribution is not tax deductible.
Donors may indicate recommendations or preferences regarding desired recipients, but the committee must remain objective when making decisions if the donor desires their donation to be tax deductible.
A good question to test this is: “Does the organization have full control of the donation to use at their discretion?”
Additionally, it may be wise to withhold the names of donors from the committee during the decision-making process. This will help reduce the risk of earmarking funds for the donor’s desired recipient.
There are many good articles online about charitable giving and sample benevolence policies. Here are a few to get you started:
If you have specific questions about your benevolence program or would like a sample benevolence policy, please contact us. We are here to help you.
Tax and accounting regulations are complex and changing faster than ever, and the confusion is distracting. At Battershell & Nichols, we come alongside you as a trusted advisor to provide clarity and solutions so you can focus on what matters most.
Here’s how you find clarity and solutions.
- Talk to Our Team. Get to know us while our CPAs make sure we understand your questions and goals.
- Understand your next steps. Uncertainty keeps us looking back. You will be able to move forward with clarity and confidence.
- Have a trusted advisor for the journey ahead. We invest in your goals and come alongside you to help you reach them!
Schedule your free consultation today. Use the button below to schedule an appointment or call us directly at (253) 839-1620.
The author is not engaged by this text in the rendering of legal, tax, accounting, or similar professional services. While the legal, tax, and accounting issues discussed in this material have been reviewed with sources believed to be reliable, concepts discussed can be affected by changes in the law or in the interpretation of such laws since this text was printed. For that reason, the accuracy and completeness of this information and the opinions based thereon cannot be guaranteed. Before taking any action, all references and citations should be checked and updated accordingly.