Beyond the Collection Plate – Understanding Charitable Contributions for Churches

By Becky DaVee, CPA, partner, Salmon Sims Thomas

Public support comes in various shapes and sizes and provides the economic fuel for churches.  From volunteer services to airplanes, from nickels and dimes to acres of land, organizations use these contributions to further their exempt purposes.  However, not all donations are considered tax deductible by the Internal Revenue Service and some non-cash donations become cumbersome for organizations to use or convert to liquid assets.  Understanding the distinctions can prevent future issues with both donors and with the IRS.

So, what are the rules that govern charitable contributions? How do churches record non-cash donations? We’ll discuss these items, and we’ll also provide you with an example of a gift acceptance policy that can be used to communicate with your donors so everyone has a clear understanding of what is and is not permissible.

IRS – Rules – The deduction for charitable contributions is one of the oldest deductions in the tax laws.  Prompted by concern that tax-exempt organizations would not be supported in a time of war, Congress passed the War Revenue Act of 1917 that included charitable deductions for contributions or gifts actually made within the year to corporations or associations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to the benefit of any private stockholder or individual.  Language sound familiar?  These activities describe our 501(c)(3) organizations today.  Of course, there were limitations on deductibility, but this new law provided the incentive for wealthy individuals to continue to support exempt organizations even during a time of war (World War I).

The Tax Code as it relates to charitable contributions has been revised three times since 1917.  However, there continues to be limitations on how much an individual can deduct for such purposes.  Charitable contributions are generally limited to 50% of the taxpayer’s adjusted gross income (AGI), but in some cases the limit may be 20% or 30% of AGI depending on the type of property donated and the donee.

As the following examples demonstrate, there are several tax benefits for donors who wish to donate appreciated stock to churches.

Stock Donation Example – John Smith purchased 1000 shares of AT&T stock in August 2009 for $26.05/share or $26,050. On May 1, 2014 he donates the stock to his church and transfers the stock directly to the church’s brokerage account. The value of the stock on May 1 is $36.57.  The following are the tax benefits to John Smith:

  1. Smith can record a charitable contribution based on the fair value of the stock or $36,570.  However, his charitable contributions will be limited to 30% of his AGI and he must itemize his deductions in his return.
  2. Smith is not taxed for the capital gain incurred on the appreciated value ($10,520) of the stock.

Determining the fair value of publicly traded stock is easy because the market values are published daily.  What if the donor wants to contribute privately held stock? What if John Smith purchased 1000 shares of Williams Company common stock in August 2009 for $15,000 and he donates the stock to the church on May 1, 2014?  He believes the fair market value of the stock is $20,000. Following are the tax benefits:

  1. Smith can record a charitable contribution based on the fair value of the stock or $20,000.
  1. Smith must obtain a qualified appraisal within 60 days of May 1 and include this information on IRS Form 8283.  The church signs Form 8283 verifying receipt of the stock donation and Smith files the form with the IRS.
  2. Smith is not taxed for the capital gain incurred on the appreciated value ($5,000) of the stock.

Financial Reporting – The church’s accounting method (cash vs. accrual) will determine how the stock donation is recorded in the general ledger. If the Church is reporting transactions under the cash method, the stock donation is not recorded until it is converted to cash (i.e., sold).  Let’s assume that the AT&T stock was sold on May 10, 2014 for $36.50/share or $36,500.  The Church would record the following transaction:

Debit     Cash                                                      $36,500

Credit    Contributions                                         $36,500

Remember, if the church’s accounting method is cash, the contribution is recorded when the asset is converted to cash.

However, if the Church’s accounting method is accrual, the stock donation is recorded when received, not when converted to cash and would be recorded as follows:

Debit     Investments (AT&T stock)                     $36,570  (FV on 5/1 – date of contribution)

Credit    Contributions                                        $36,570

When the stock is sold the transaction would be:

Debit     Cash                                                     $36,500  (FV on 5/10 – when sold)

Debit     Loss on sale of investment                    70   (Difference in FVs)

Credit    Investments (AT&T stock)                      $36,570

Key Points – The church should consider the following key points when soliciting and accepting donated stock:

  1. Create a brokerage account that handles stock donations directly from donors.
  2. Direct the donor to the brokerage account, eliminating the finance office as the intermediary.
  3. Convert the stock to cash as soon as reasonably possible.
  4. Use a weekly bulletin or website to communicate the ways in which stock donations will be accepted and processed.

Probably the more important aspect of soliciting donations is determining which types of donations the church will accept. Cash and cash equivalent items are easy to process and record, but non-cash donations can consume the time and energies of the finance department.  Does the church want to accept historical sculptures, paintings, jewelry or 20 acres of property in Alaska?  A gift acceptance policy communicates the types of items the church will accept and allows the church to politely say “no” to a potential donor if the effort expended will exceed the value of the contribution, or if the contribution is not compatible with the church’s mission and/or vision.

Gift Acceptance Policy – The following is a sample policy that allows the church to review selected items before acceptance:

Church of XYZ solicits and accepts gifts that are consistent with its mission.  Donations will generally be accepted from individuals, partnerships, corporations, foundations, and other entities, without limitations.  In the course of our capital campaign, Church of XYZ will accept donations of money, real property, personal property, stock, and in-kind services. Certain types of gifts must be reviewed prior to acceptance due to the special liabilities they may pose for Church of XYZ. Examples of gifts which will be subject to review include gifts of real property, gifts of personal property, and gifts of securities.

Creating a Policy – When creating a gift acceptance policy, consider the following:

  1. Mission/Vision of the church: Keep this as your primary focus in donor solicitations.
  2. Clearly articulate the purpose of the policy.
  3. Identify circumstances when an attorney will be involved, whether on behalf of the donor or of the church.
  4. Conflicts of interest:  Identify circumstances where the donor should seek professional consultation prior to donation.
  5. Type of donation:  Specifically identify what types of items will be accepted and those that will be declined.
  6. Restricted gifts: Identify donor restrictions that are acceptable to the church.
  7. Committee review: Identify the group that will have authority to approve or reject a donation.
  8. Reporting:  Identify the reporting requirements that will be performed by the church including any IRS forms required for certain donations.

In many situations non-cash contributions are tremendous blessings for churches.  However, there are situations when an item is accepted, then stored off site because the church couldn’t utilize the item in their activities or sell it. It’s perfectly acceptable to politely say no, citing the gift acceptance policy, but only if a policy is in place beforehand.  Remember, your goal is to further the mission/vision of the church, not to become a reseller of items that have no purpose in the church’s ministry.

This article was published in The Ledger, Volume 33. To view the article, please click here.

For more information about tax deductible contributions or other issues affecting churches and non-profit organizations, contact Rebecca M. DaVee, CPA, partner Salmon Sims Thomas & Associates.