Some types of gifts do not result in a tax deduction and no contribution acknowledgment should be provided by the church:
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Beyond due diligence. Some donors to your charity may want to make sure their gifts are put to good use. As long as your charity clearly owns the gift, and the donor and charity agree that it will further the charity’s purposes, the IRS approves. But they draw the line when the donor demands too much control, intending to benefit a private class of people rather than the public at large. For example, a gift made to a church with the requirement that the funds be used to provide scholarships to students from the church with the donor’s last name. The IRS would undoubtedly reject an income tax deduction for this type of gift.
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Passing gifts through to pastors or other employees. A church member may donate a car, a personal computer, or some other asset and specify that the property be given to one of the church pastors. The member expects a charitable contribution receipt and wants the pastor to have the gift without incurring any taxes on the gift. Should the church accept the gift and what are the consequences of the gift?
Before accepting such a gift, the church must determine if it can exercise adequate control over the gift and if the specified use of the gift would result in appropriate compensation for services rendered to the church. If the church does not feel comfortable with these issues, the gift should be declined. If the church feels that it can properly accept the gift, the fair market value of the assets distributed to staff members must be included on Form W- 2.
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Strings attached. Agift must generally be complete and irrevocable to qualify for a charitable deduction. There is usually no gift if the donor leaves “strings attached” that can be pulled later to bring the gift back to the donor or remove it from the control of the church.
Example: A donor makes a “gift” of $10,000 to a church. The “gift” is followed or preceded by the sale from the church to the donor of an asset valued at $25,000 for $15,000. In this instance, the $10,000 gift does not qualify as a charitable contribution. It also raises the issue of private inurement relating to the sale by the church.
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Services. No deduction is allowed for the contribution of services to a church.
Example: A carpenter donates two months of labor on the construction of a new facility built by your church. The carpenter is not eligible for a charitable deduction for the donation of his time. The carpenter is entitled to a charitable deduction for any out-of-pocket expenses including mileage (14 cents per mile for 2005) for driving to and from the project. If out-of-pocket expenses are $250 or more in a calendar year, the carpenter will need an acknowledgment from the church.
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Use of property. The gift to a church of the right to use property does not yield a tax deduction to the donor.
Example: A donor provides a church with the rent-free use of an automobile for a year. There is no charitable deduction available to the donor for the value of that use. If the donor paid the taxes, insurance, repairs, gas or oil for the vehicle while it is used by the church, these items are deductible as a charitable contribution based on their cost.
The Zondervan Church and Nonprofit Tax & Financial Guide,
Dan Busby, CPA, author