When you fundraise with your youth group, do you give them money based on their participation? Do you track this by giving them an individual fundraising account? You could be jeopardizing your church’s 501(c)3 status and you don’t even mean to be!
When the distribution method of the fundraising proceeds is the creation of an “account,” whereby, the money an individual member raises during a fundraising event is reserved for that member alone or when records are kept showing how much each parent or student contributed to the fundraising efforts, these records are considered individual fundraising accounts (IFAs) and potentially cross the line by providing more than just an insubstantial accrual of private benefit to an individual. The IRS has stated IFAs may disqualify an organization from tax-exemption as a public charity. (source)
Scary, right? If you’ve been putting fundraising dollars into individual student’s accounts (don’t worry, I did it when I was in the local church!) it’s time to stop! This is nothing to mess around with.
Treasury regulations state, “An organization is not organized or operated exclusively for one or more of the purposes specified … unless it serves a public rather than a private interest.” Thus, when an organization credits specific fundraising accounts, it is operating for the benefit of private interests, such as the designated individuals. (source)
So what do you do? Well, first, stop using individual accounts. Fundraising is completely acceptable, but it needs to be used to the benefit of the entire group. It can offset the cost of mission trips or to help your budget, but it needs to benefit everyone – not individuals. Not sure if what you are doing is wrong?
Because of the complexity of the private benefit rules, there is no bright line determination of when private benefit has been provided. However, an important consideration for your organization is if you are earmarking funds for the benefit of a specific member or to a specific member’s required fundraising account, this practice may be jeopardizing the organization’s tax-exempt status. (source)
This issue is also addressed on the IRS website. The instance in question involved the Boy Scouts of America, but the principles are the same.
So what can you do? One fantastic youth minister suggests creating an opt-out fee. For example, when you get ready to plan for your trip, set your actual cost per person for the trip. Let’s say that actual cost is $400/person. If you plan to fundraise to cover $150 of each participant, you charge your students $250 and give them an opt-out fee of $150. If they want to go on the trip, they either pay the opt-out fee or they participate in the fundraisers. This all needs to be presented to each potential participant up front – before they sign up. This will take some planning – you’ll need to know the cost per person for the trip and how much you plan to make fundraising. With a little planning, this is your best bet!
Questions? Be sure to speak with your church business administrator – they should know best how to handle your specific situation.