What expense category is Benevolence Fund Payments?

For churches and many nonprofit organizations, providing financial assistance to individuals and families in need through a benevolence fund is a core expression of their charitable mission. These payments, made to help with essentials like rent, medical bills, or utilities, are a direct fulfillment of the organization's purpose.

For church administrators and nonprofit leaders, it is absolutely critical to account for these payments correctly. They are not a simple administrative cost but a primary program expense that must be managed with care to ensure compliance with IRS rules and maintain the trust of donors. 

This guide will clarify how to categorize benevolence fund payments and the crucial tax and legal principles you must follow.

Benevolence Fund Payments Category

For a church or nonprofit organization, payments made from a benevolence fund to individuals or families in need are a direct program expense.

Specifically, on the Form 990, these payments are reported in Part IX (Statement of Functional Expenses) on Line 1, Grants and other assistance to domestic individuals. This classification signifies that the payments are a primary activity that directly carries out the organization's tax-exempt purpose.

Important Considerations While Classifying Benevolence Fund Payments

To ensure compliance and protect your organization's tax-exempt status, you must adhere to several critical IRS rules.

The Church Must Control the Funds

This is the most important rule. For a donor's contribution to the benevolence fund to be tax-deductible, the church must have full control and discretion over the use of the funds.

IRS Publication 526 is clear that a donor cannot deduct a contribution that is earmarked for the relief of a particular individual or family.

• Allowed: A donation to the church's general benevolence fund, which the church then uses to help a needy family based on its assessment.
• Not Allowed: A donation given to the church with the instruction to pass the specific amount on to the Smith Family. This is considered a non-deductible gift from the donor directly to the Smiths.

Objective Criteria and a Formal Policy

Your organization should have a formal, written benevolence policy. This policy should establish objective criteria for determining who is eligible for assistance and how that assistance is provided. This ensures that payments are made to a charitable class of beneficiaries and not to pre-selected individuals, which is essential for maintaining the integrity of the fund.

Payments as Gifts, Not Income, to Recipients

Benevolence payments that are made based on financial need and are not a form of compensation for services are generally considered gifts to the recipients and are not taxable income for them.

Tax Implications and Recordkeeping

Properly accounting for benevolence payments is essential for your organization's financial statements and annual IRS reporting.

How to Report the Expense

On Form 990, benevolence payments are reported on line 1 and must be allocated to the program services column. This is a key metric that demonstrates to the IRS and the public how much of your organization's spending goes directly to fulfilling its charitable mission.

What Records to Keep

You must maintain meticulous and confidential records for all benevolence fund activities. Your records should include:

• The formal benevolence fund policy document.
• A confidential application or request form from the individual seeking assistance.
• Documentation of the objective assessment process used by the church to determine need.
• A record of each payment made, including the date, amount, and purpose (e.g., rent assistance, utility payment).
• Proof of payment, such as a copy of the check made out to the landlord or utility company.

How Fyle Can Automate Expense Tracking for Benevolence Fund Payments

Fyle helps you manage and document your benevolence fund disbursements with the necessary confidentiality and control, ensuring a complete and compliant audit trail.

• Track Each Payment: Securely capture every benevolence payment to create a clear and unalterable record of all assistance provided.
• Centralize Confidential Documents: Attach the confidential application, assessment notes, and proof of payment directly to the expense record in Fyle.
• Track by Program: Code all payments to your Benevolence Fund program for accurate financial reporting on your Form 990.
• Automate Your Accounting: Sync the categorized program expense directly to the correct GL account in QuickBooks, Xero, NetSuite, or Sage Intacct.