It’s the time of year we commonly announce and collect special gifts, often called “love offerings,” for our ministry staff. Proper handling of these gifts can be complex. The IRS has ruled on a number of cases that provide guiding principles for both donors (as to tax deductibility of the gift) and recipients (as to whether the gift should be treated as income).
- If a gift is made directly from a donor to a staff member without any involvement by the organization, the gift would not be tax deductible by the donor and not taxable income for the recipient. The key here is that the funds are strictly a personal gift and don’t constitute compensation. The IRS does limit these gifts to $13,000 annually (rises to $14,000 in 2013).
- If a qualified nonprofit receives a gift for a particular staff member which is not intended for use by the organization, the gift is not tax deductible by the donor. However, the funds distributed to the staff are considered taxable income and should be added to their W-2 wages (for an employee) or reported on Form 1099-MISC (for an independent contractor). Section 102(c)(1)(a) of the IRS Code states that “any amount transferred by or for an employer to, or for the benefit of, an employee is not excludable from gross income as a gift.”
- If a qualified nonprofit preauthorizes a love gift fund for staff and maintains adequate discretion and control over distribution of those funds among the staff, the donations are tax deductible. Again, in this case, the funds distributed to the staff are considered taxable income and added to their W-2 wages or reported on Form 1099-MISC. Adequate discretion and control would include determining the distribution of funds among the staff as well as ensuring that the staff does not receive more than a reasonable amount of compensation through a love gift. For example, if the organization received a gift of $1 million in the love offering fund, it would need to ensure that total compensation did not represent unreasonable compensation for the staff. Most likely this would mean not distributing the entire amount to the staff.
See what I mean about this being a complex issue? “Love offering” sounds so simple, until you read the IRS Code. For this reason, I offer the following fine print:
This post is provided by ECCU for educational purposes only. It is not intended to be legal or accounting advice. ECCU disclaims any liability arising out of your use of, or any financial position taken in reliance on, information provided in this post.