Accounting for donations toward medical expenses

[atyron]

Our church would like to collect donations from individuals who would like to contribute toward a church member's medical expenses for cancer treatment.

I am unsure as to the best way to set this up for accounting purposes. I currently use only one accounting fund (a general fund) and one checking account. After doing a little research, it appears that the best way to do this would be to treat these donations as pass-through contributions. Any thoughts?? I had considered creating another accounting fund, but that might be overkill... I need to keep things separate from the income & expenses in the general fund because I don't want the donations skewing our budget numbers, and it appears pass-through would solve this problem.

If anyone has done something similar, or has any suggestions, I'm all ears. Thanks!

[JohnDMeyers]

A donor restriction would be an appropriate way to account for this.

It won't affect your normal budget, because you will have a separate income and expense account for this purpose. Since you only need one income and one expense account, setting up another fund for this purpose would also be overkill.

A pass through account (liability account) is usually used when you are collecting money to give to another non-profit organization. In this case, you are collecting money to give to a church member, so that is why I would use a donor restriction.

[atyron]

Donations received by the church will go directly into the member's health savings account; that way the funds are out of the member's hands. They can only access them through their health savings account.

If I set this up as a donor restriction within my accounting fund, contributions to a donor restricted account will appear as income as part of the total income, and funds paid out of it will appear as expenses, as it occurs with my other dozen or so donor restricted funds. I'm trying to avoid these special contributions from inflating our income and expenses.

I agree the second fund accounting will be overkill. My additional concern is recording the contributions because I believe they will be tax-deductible and those within our church would most likely want it to appear on their contribution statement. It doesn't look like that would happen with pass-through contributions. Unless... I recorded the contribution but only updated the contribution module, not posting to the general journal.

The wheels in my head keep turning and turning... Thanks for your input!

[NeilZ]

Actually, because all the funds are going to support one member, the contributions are NOT tax deductible. If the church had a fund then dispensed money from the fund to various people, then donations would be tax deductible.

I forget the IRS rule on this, but you can verify this by finding the IRS publication concerning charitable giving.

[JohnDMeyers]

You can use a pass-through given the criteria you have.

You can post from contributions to fund accounting, and it won't upset your total income or expenses.

Create a liability account:
01-2120-000 Health Savings for Member

Create a Contribution Fund 201:
DB 01-1110-000 checking
CR 01-2120-000 Health savings for Member

Pay the money to the health savings:
CR 01-1110-000 checking
DB 01-2120-000 Health Savings for Member

As you can see, no income nor expense account is affected. The money comes in and out and can be recorded in fund accounting as passing through.

My reply and Neil's reply happened at the same time. If this contribution is determined NOT to be tax-deductible, it can still be recorded as I have shown above. In the Contributions module under fund 201, check the box "Services Received" and allow on statements, or <none> and uncheck "allow on statments". Either way.

[JohnDMeyers]

You will still want to record the contributions and handle the money. I'm guessing that your church members are motivated beyond receiving a tax deduction for their gift.

[atyron]

That looks like it will do the trick. Thank you for your help! I'll followup on whether or not the donations are tax deductible...

[beas]

To expand on Neil's statement:

If contributions to the fund are earmarked by the donor for a particular individual, they are treated, in effect, as being gifts to the designated individual and are not deductible. However, a deduction will be allowable where it is established that a gift is intended by a donor for the use of the organization and not as a gift to an individual. The test in each case is whether the organization has full control of the donated funds, and discretion as to their use, so as to insure that they will be used to carry out its functions and purposes. Revenue Ruling 62-113

[debbieg]

Just to repeat what was said before....these donations are NOT tax deductible!! It doesn't appear that your church will have any control over how this money is used by the family to handle medical expenses. Basically, your church is just acting as a conduit and facilitating the transfer of money instead of multiple individuals giving money to the family.

If instead your church had a benevolent fund that was used for church families in need, money could be given to that fund and would be tax deductible. But it would have to be understood that the people in charge of the benevolent fund could use that money as they saw fit....maybe for the family in question, maybe for other needy families. Once you put a stiplulation that it is to be used for only one person, you lose the charitable deduction benefit.