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  • Writer's pictureMichael Wright

Understanding the Importance of Fund Accounting for Churches: A Closer Look at IRS Requirements

Updated: Jun 4

In the realm of accounting, fund accounting holds a crucial role, especially for institutions like churches that handle finances with a specific purpose and transparency in mind. The Internal Revenue Service (IRS) has laid out requirements that aim to ensure proper financial management in religious organizations. Let's delve into the significance of fund accounting for churches and the essential IRS regulations that must be adhered to.


5 Fundamentals of Fund Accounting for Churches


  • Transparency and Accountability : Fund accounting enables churches to segregate financial activities into different funds, providing a clear view of how money is received and allocated for various purposes.

  • Compliance with Donor Restrictions : By maintaining separate funds for unrestricted and restricted donations, churches can honor donors' intentions and comply with IRS regulations regarding fund usage.

  • Budget Planning and Resource Allocation : Effective fund accounting allows churches to create budgets for specific funds, helping in better resource allocation and financial planning for programs and initiatives.

  • Financial Reporting : Detailed financial reports generated through fund accounting help churches track income and expenses for each fund, ensuring financial accountability and transparency to congregation members and stakeholders.

  • IRS Compliance : Adhering to IRS regulations, including filing Form 990, is essential for churches to maintain their tax-exempt status. Fund accounting plays a critical role in facilitating accurate reporting and compliance with IRS requirements.


Below will take a closer look at the the most common funds, the general fund and the building fund. The same principals apply for any and all funds that a church may have

 

During a church service some time ago, the pastor mentioned that he had used funds from the building fund to cover his salary. Aware of my presence and my expertise in church accounting, bookkeeping, and tax regulations, he shared this information. This raised concerns for me, prompting a discussion during lunch where I explained the legal implications of such actions. The pastor claimed to have received approval from the denomination headquarters, which was untrue. While many churches believe that financial decisions rest with the pastor or finance committee, the reality is that donors hold the authority over how their contributions are utilized.

 

Donations are intended for specific purposes as designated by the donor. For instance, funds raised for a nursery construction project cannot be diverted to cover operating costs or salaries. Violating these guidelines would breach IRS regulations. If surplus funds are collected, the church can either refund the excess to donors equally or seek permission to reallocate the funds. Transparency is crucial, and it is advisable to inform donors upfront about potential fund reallocations. Notably, separate bank accounts for each fund are not mandatory.

 

 

Utilizing Benevolence Funds

 

While serving as a pastor, I received a request for assistance from an individual claiming to be a struggling father. When I requested to meet and verify the need, the person reacted negatively. It is essential for churches to follow a structured process when providing aid to ensure accountability and proper usage of funds.

 

Most churches maintain benevolence funds to support their community or members. Proper documentation is crucial to comply with nonprofit regulations. Establishing an application and approval procedure is necessary to verify needs and prevent misuse of funds. Directly paying landlords or utility companies and offering gift cards for essentials helps ensure that the aid addresses immediate necessities. The focus should be on meeting needs rather than fulfilling wants.


Conclusion


Fund accounting is not just a financial management tool; it is a reflection of a church's commitment to transparency, accountability, and compliance with legal requirements. By understanding the intricacies of fund accounting and adhering to IRS regulations, churches can strengthen their financial stewardship and maintain the trust of their members and the community.


Fund Accounting

Through proper fund accounting practices, churches can uphold their values, fulfill their missions, and ensure that financial resources are handled responsibly and ethically. Let us continue to navigate the world of fund accounting with diligence and integrity.


For more resources on enhancing your church's financial practices, consider exploring relevant courses for further guidance.

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