Regardless of the size of your church, the basic fundamentals and principals of church finances remains the same. Many of the same questions are asked over and over. This page is to help provide answers to the most common questions we are asked about church finance topics. We hope they are helpful to you as well.
What are Designated Funds?
Designated funds are those "piles of cash" that churches want to set aside for a particular expense. They are not part of the budget, but are funds that the church wants donors to be able to donate to and still be able to claim a tax-deductible contribution for the donation. . Ex. Van fund, New roof, Student Mission Trip, etc.
These funds MUST be voted on and approved IN ADVANCE before members may donate monies to them that will be tax-deductible to the donor.
What are Restricted Funds?
Restricted funds are those monies that are set aside for a VERY specific purpose that MUST be used for ONLY that purpose and no other. Contributions to these types of funds are NOT tax deductible to the donor as the donor is retaining control of the funds by saying that they MUST be used for their stated purpose and no other.
EX. New carpet for the choir room, Robes for the choir, a new van for the Sr. Adults, etc.
The difference here between this and Designated funds is that Designated funds have been voted on by the church and the church intends to utilize those funds in the near future. Restricted funds most often are set by the donor and the church had no intention at that time to purchase "xyz".
If the church decides to not purchase the new carpet, etc., then they are required to do one of two things:
1. They must get permission from the donor to use the funds for another purpose
2. They must return the monies to the original donor.
How much Housing Allowance Can our Minister Take?
The IRS has not set a specific amount that may or may not be set as a Ministers Designated Housing Allowance. They do however require Reasonable Compensation Rules to be followed. If the Designated amount is Reasonable, then the amount may equal up to 100% of the Ministers salary. Always contact your tax professional for advice on setting this amount.
How often can the Housing Allowance be Changed?
The Designated Housing Allowance may be changed at any point in the year. The key to remember here is that the Ministers Housing Allowance is PROACTIVE and not RETROACTIVE. This means that if you make a change to the Housing Allowance on June 15th, the change goes into affect the very next pay period AFTER June 15th, and CANNOT be "backdated" or affect any prior Housing Allowance amounts received.
Does my Church need to File for 501c3 Designation?
This question is asked A LOT! And here's my professional answer. The IRS automatically considers a church to be tax-exempt
BUT here's the catch...
If your church is affiliated with a national denomination, then you're good-to-go! You simply request a Letter of Good Standing from your denomination office that includes their T-E number along with a statement stating that your church is a member of the denomination and therefore falls under their "tax -exempt umbrella". Issue resolved.
If your church is NOT affiliated with a national denomination, even though the Federal government considers you tax exempt, other agencies and individuals may not because your name will not show up on the IRS's Charitable Organization listing which you can access here
By not having the official 501c3 Determination Letter for your church, organizations may choose not to give you benefits/services that they offer other nonprofits who can provide proof of status. Also, individuals may decide not to donate to your church because of the chance of having their donations disallowed by the IRS in an audit situation (yes, this does happen).
So there you have it. The choice is really up to each individual church to decide if the cost of filing is worth the risk of losing other benefits and contributions.