By Christine Abrams and John Butler
Churches often maintain benevolence funds to assist needy individuals in times of financial crisis. However, these churches may not have enough structure in place to provide essential direction and documentation.
It is important to follow a written policy and maintain records of assistance provided to protect the tax exempt status of the church, the deductibility of donations designated to the fund, and the persons receiving assistance from mistaken taxation. A well designed process also provides direction and accountability to those responsible for making disbursements from the fund.
Benevolence program don’ts:
1. Distribute funds to people without supporting documentation.
2. Disburse funds out of a bookstore cash register or out of uncounted offerings.
3. Disburse funds without a written record of the transaction.
4. Allow members to donate to a specific family or individual and receipt these donations as tax deductible.
5. Give one individual control over benevolence distributions, without oversight or accountability measures in place.
Benevolence program do’s:
1. Adopt and adhere to a written policy.
2. Make distributions from a general fund or benevolence fund.
3. Pay assistance directly to service providers (rent, mortgage, utilities, etc.).
4. Allow contributions only to the fund, not to any specific individual or family.
5. Develop adequate criteria to determine individual need.
6. Document the need including external verification for larger amounts.
7. Assign personnel or a committee to approve requests.
8. Include reasonable limits of support per person during a specified time period.
9. Determine the kinds of needs that will receive support, keeping in mind typically assistance is allowed for basic needs: food, shelter, clothing and medical.
Why is a written policy so important? A written policy helps prevent misunderstandings about the purpose of your program and its parameters. Having written criteria helps decision-makers affect consistent evaluations and holds them accountable to these pre-determined guidelines. If your program or disbursements are challenged in an audit, a written policy provides evidence that the church has established a benevolence program in keeping with your exempt purpose.
What’s wrong with taking cash out of the offering plate to help someone in need? (1) Using cash from the offering plate does not provide a record of the assistance. (2) The opportunity for abuse is high. Even a trusted employee under enough pressure (others may not even know about the pressure), given the opportunity, can rationalize an inappropriate disbursement. Limiting opportunity for misuse of funds protects the church, its employees, and volunteers.
What information should be gathered for an assessment of need? The extent of your data gathering depends on the type of request. For short term assistance during a disaster it could be sufficient to view the disaster and confirm the individuals live in that area. In the case of longer term or a greater amount of assistance we recommend a financial assessment through completion of an application.
Items to consider requesting in the application include but are not limited to: employment status, dependents, church involvement, references inside and/or outside of the church, a list of present income and expenses, and/or a list of assets owned. A sample application is available online at www.ecfa.org.
What is the minimum required record that must be kept when a church provides benevolence aid? A church (or other organization) which provides benevolence assistance should maintain adequate records and case histories to show:
- The name and address of each recipient of aid
- The amount distributed to each
- The purpose for which the aid was given
- The manner in which the recipient was selected
- The relationship, if any, between the recipient and other members, officers, or trustees/directors of the organization
What is external verification? Verifying the information provided by the applicant with another source. This could be individuals listed as references on the application, an employer or another church member.
Does the church need to issue a 1099-Misc when assistance over $600 is provided to a needy person? No. Benevolence is not a payment for services, but a gift.
Can we assist an employee with benevolence and not show it as taxable income on their W-2? This may be accomplished by having a formal hardship assistance plan in place in advance of the assistance being given. IRS Publication 3833 describes the requirements of an employee hardship assistance plan.
Is it ever okay for the church to receive amounts from members which are designated to a specific individual or family? In some cases churches agree to collect specifically designated funds but should only do so with a clear communication to donors that their payment will not be credited as a tax deductible contribution. In other instances a church member might recommend a needy individual to the benevolence committee. The committee will determine what if any amount to grant any individual.
Christine Abrams is tax manager and John Butler is tax counsel for Capin Crouse LLP, Greenwood, IN. [www.capincrouse.com]
This article is intended to provide accurate and authoritative information in regard to the tax issues covered. It is provided with the understanding that the authors are not engaged in rendering specific accounting or tax advice. If tax or other expert assistance is required, the services of competent professional persons should be obtained.