Article by: Anna Baumgardner, CPA, Senior Client Advisor for Nonprofits

Contributions fall into two categories: those with donor restrictions, and those without donor restrictions. Contributions with donor restrictions are designated by the donor for specific projects or purposes other than general use. Any use of the funds outside of the donor’s specifications may cause the nonprofit to be legally obligated to return the funds to the donor. Additionally, only the donor may impose such restrictions on donated funds.

The nonprofit can earmark and budget general use funds for specific projects, but unless the donor indicates restriction, the funds can be repurposed within the organization’s mission. Contributions received that do not meet the general definitions previously described for funds with donor restrictions are considered funds without donor restrictions.

Using these parameters, let’s look at some examples of funds with donor restrictions:

  • Donation received to construct an annex
  • Contribution to buy a cargo van
  • Payment for a particular student to attend a particular class/semester

Impact of Restrictions on Contributions

Funds with donor restrictions are sometimes unsolicited, and typically come with their own paperwork defining the restricted use. Sometimes the restrictions are easy to accept – such as a restriction to use the funds only to pay the mortgage, cover salary expenses, or use for a specific existing program – and the contributions can be easily folded into operations. Unfortunately, sometimes the restrictions are not so convenient – such as a restriction to only use funds for construction that is not yet approved, a class that is not gaining enrollment, or to provide support in a region where the nonprofit does not (or cannot) operate. In these cases, the organization has the option to request that the donor modify or rescind the restriction, or in rare instances even refuse the donation.

Accounting for funds with donor restrictions can be a lot of work and worry. Nevertheless, there are steps you can take when soliciting funds to ensure that donations are not accidentally donor restricted:

  1. Provide the Big Picture – describe the mission of the nonprofit, and provide context for what the organization does to fulfill that mission. “Your donation will support the development of literacy skills for people with limited access to education and reading resources.
  2. Keep the request for contributions general – on your form for providing contributions, make sure that the phraseology focuses on the general goal. “Here is my gift of $ ______ to provide food, care, and shelter for rescued animals.
  3. Include a disclaimer for “general use” on donation receipts – the giving form should include wording to tie the donation back to the nonprofit’s mission. “Thank you for your generous gift, which will be used to support the cancer-ending mission of our organization.

How You Ask for Donations Matters

When raising funds to support specific projects, those contributions may inherently have donor restrictions. You may also want to specifically solicit donations with donor restrictions to generate more targeted giving. To narrow down the restrictions, provide specific wording on the solicitation materials and giving forms, such as the following:

  • “Your donation will cover the administrative costs incurred by our organization to provide 50 first-year students with textbooks and online support for 2021 Fall courses.

  • “Please use my gift of $______ to provide veterinary care to re-homed pets as part of your 2021 Empty the Shelter Campaign.”

Keep in mind that contributions with donor restrictions may come with some complex strings attached, but those restrictions are commonly aligned with your organization’s purpose and mission. Because funds with donor restriction are legally separate, they are also separately reported in the financial statements.

As costs are incurred to “use up” the funds for the specified project, funds with donor restrictions are reclassified to funds without donor restrictions. The timing of recognition depends on the circumstances surrounding the donation with donor restriction, and can be quite complex depending on how the restrictions are defined by the donor. The actual accounting is outside the scope of this article, so please reach out to us for assistance with your restricted funds!

Work with the Nonprofit Accounting Experts

Should you have any questions about how funds with donor restrictions may be used by or affect your organization, we are happy to provide guidance. As always, feel free to reach out to us!