- Learn about different types of fundraising.
- Learn how to operate a business to generate funds.
From Guide to Representing Religious Organizations, Chapter 4
The Need to Raise Funds
Almost every religious organization engages in some kind of fundraising activity that generates income to sustain the organization’s programs and activities. Some religious organizations establish large and ambitious fundraising projects in order to undertake equally ambitious building, missionary, or charitable projects. Other religious organizations are content with a steady stream of regular support from members of the congregation. For many religious organizations, it is a fundamental tenet of their religion’s doctrine that the members are required or encouraged to give regular offerings of support to the church or temple.
There are several important aspects to fundraising, including how the contribution is solicited, what is contributed, and the consequences of the donation, both to the donor and the recipient organization. This chapter discusses these aspects of fundraising and gives guidance as to how a religious organization should approach fundraising in order to comply with the applicable laws and regulations. Regardless of how and why funds are raised by religious organizations, there is always a potential for abuse and mismanagement of donated funds. Because of this, fundraising is subject to regulation under federal, state and local laws. Any fundraising program should be undertaken with a clear understanding of the responsibilities and duties that are involved in raising money.
Types of Fundraising
Outright Gifts: Weekly Offerings and Other Gifts
The most useful gift for any organization is cash, given now, with no restrictions. Sometimes when setting up fundraising programs, organizations forget that cash now is more valuable than the same amount of cash received a number of years from now.
Most religious organizations with regular congregations ask for a weekly offering or tithing from their congregants, which is given as a free gift to the organization. This is usually the largest income stream for such an organization. In order to be deductible, the organization must receipt the gift or, if less than $250, the donor must maintain a contemporaneous written record of the gift. For a cash gift of less than $250, a donor must have either a bank record or a written communication from the organization in order to substantiate the contribution. Bank records include canceled checks, bank statements, and credit card statements. Statements should show the name of the charity, the date, and the amount paid. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement, or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity. Some churches will provide offering envelopes in order to assure that offerings are correctly receipted; otherwise the donor is well advised to make the contribution by check, so that the contribution can be tracked and receipted.
Special Campaigns and Restricted Gifts
Religious organizations are often faced with the daunting task of raising money for specific purposes in addition to the general operations of the organization. For example, the organization may make a special appeal for a new building or perhaps engage in a fund drive for a mission program. Whatever the purpose, special campaigns are a normal part of the operations of a religious organization and can even build up the religious community by creating opportunity for outreach and fellowship.
It should be noted that when funds are raised for a specific purpose, they must be used for this purpose, unless the organization is careful to use qualifying language in the campaign that allows the funds to be used for another purpose. Even when the organization itself has not limited the purpose for which funds are being raised, if a donor specifies that his or her contribution must be used for a specific purpose and the organization accepts the contribution with this restriction, the organization is required to use the funds only for the purpose for which they were given.
Special events such as banquets, carnivals, and golf outings can generate revenue as well as provide entertainment for the members and supporters of a religious organization. Depending on the type of event and how it is managed, fundraising events can be expensive to produce. In some cases, fundraising events can end up costing the organization more money than they raise. Nevertheless, these events can create goodwill and positive relationships between the organization and potential donors. Even if a particular event does not generate income to the organization, there may still be long-term benefits that justify holding the event. Obviously, such decisions should be made by the governing board with full knowledge of the costs and benefits. If the event does not make money and funds are paid to an event vendor who is an insider or someone affiliated with an insider, the event could be viewed as being an inappropriate benefit to the insider.
Whenever an organization sponsors a live event, it increases the risks and potential liabilities. The organization should work to minimize these risks by careful planning. Depending on the type of event, additional insurance, security, employees, etc., may be required or advisable. With at least some of these events, the contributors/attendees may not be able to deduct the full amount of their contributions. Therefore, special attention must be paid to the information and representations made regarding these payments.
Gifts in Kind
Some organizations raise funds by obtaining “gifts in kind” (goods, or in some cases services, rather than cash) from interested donors. Sometimes the organization will, in turn, sell the gifts to raise cash. Thrift stores are often used for this purpose. Other times the organization will use these gifts in kind directly. For example, a hospital might receive contributions in the form of pharmaceuticals, a school might receive contributions of books for its library and a church might receive food and other supplies for its local food bank. All of these items are used directly by the organization. The law varies substantially as to the value of the charitable deduction that can be taken by the contributor, based both on what is contributed, and the use made of the contribution.
For many people, their largest single contribution to their religious organization is made through a deferred gift—that is, a gift delivered at some point after the gift is made, often after the donor has died. The gift may be given in a lump sum or may be spread out over a period of time. Deferred gifts are also known as planned giving, because they incorporate the donor’s charitable desires into his or her overall estate and financial arrangements. In other words, the donor plans how and when to make the gift. This can be done either through a will or a special trust or some other vehicle. Different types of planned giving devices are discussed more fully below. Many are designed to provide for a current tax deduction, even though the funds are provided at a later time.
Operation of a Business to Generate Funds
While established for tax-exempt religious purposes, an organization may still engage in the sale of goods or services. Religious organizations are permitted to engage in business activities both as a means to promote their religious purposes and as a way to raise money. For example, a religious school provides its services in exchange for tuition, but it is carrying out its exempt purpose through the operation of the school. On the other hand, the organization may sell items or engage in other commercial activity, the primary purpose of which may be to raise money.
In order to maintain its tax-exempt status, a religious organization must continue to be operated primarily for exempt purposes and only secondarily for commercial purposes, if at all. In other words, there are limits as to the degree and extent that a commercial operation may be carried on by a taxexempt organization. If the commercial operations are not related to the exempt purposes of the organization, the organization will be taxed on the profits earned on such unrelated business activity (UBI).1 Further, if the business activities become a significant part of its activities, the organization risks losing its exempt status. To avoid this consequence, an organization may wish to consider establishing a nonexempt subsidiary business entity through which to conduct its significant business operations.
As an example of this problem, in one case involving a religious publishing company, the organization had, for a number of years, published Sunday school materials without making a significant profit.2 For some reason, although the organization did not change its activities, the materials became very popular and the amount of money the organization began to make increased dramatically. Although the organization claimed that its purpose had not changed and that the activities continued to be related to its purpose, the court found that it was being operated for profit, and, therefore, the organization was no longer tax exempt. On the basis of this case, an organization must be aware that if it is successful in raising a significant amount of money through its “business” operations, this success may be found to actually trump the religious purposes of the activity and subject the organization to loss of its tax-exempt status.
In addition to tax consequences, when a religious organization engages in commerce or in the production of goods, it may become subject to additional laws and regulations regarding labor and employment standards, both at the state and federal levels, from which it might otherwise be exempt. Some laws that may apply to commercial activities even if they do not apply to the organization’s religious activities, include the National Labor Relations Act, the Fair Labor Standards Act, and the Occupational Safety and Health Act.3
Many states permit religious and charitable organizations to conduct gaming activity in order to raise funds. Such laws often limit the number of gaming events the organization may hold each year or only permit certain games, such as bingo and raffles. In addition to being subject to state civil and criminal law regulations, income from gaming may be taxable to the religious organization.4 Gaming is not considered a charitable activity. It should be noted that the volunteer exception may apply to income from gaming, if substantially all of the gaming activity is staffed by volunteers. There is also a special exception to taxation for income from traditional bingo games.5 Note, however, that under this exception, the bingo must be “traditional bingo” and that it must be permitted under state and local laws and also may not be an activity otherwise carried on in the jurisdiction as a commercial activity. In addition, winnings may also be subject to employment, wagering, and excise taxes and the organization may be required to withhold on the winnings from gaming for tax purposes.6 Finally, state laws may impose additional reporting and disclosure requirements for both tax purposes and other regulation.
1. See also chapter 3 of this book, “Tax Exemption and Taxation of Religious Organizations,” Section IV, Unrelated Business Income.
2. Scripture Press Foundation v. United States, 152 Ct. Cl. 463, 285 F.2d 800, (1961) cert. denied, 368 U.S. 985 (1962).
3. See also chapter 5 of this book, “General Employment Law for Religious Organizations.”
4. See chapter 3 of this book, “Tax Exemption and Taxation of Religious Organizations,” Section IV, Unrelated Business Income.
5. IRC section 513(f).
6. See IRS Publication 3079, Gaming Publication for Tax-Exempt Organizations.