Non-Profit Donations: Managing Donor-Restricted Gifts

By: Lena Parks, CPA 

“Restricted Area: Authorized Personnel Only” and “Caution: Restricted Area” are signs we have all seen in some form or another. The signs are usually bright red or yellow so all individuals who see the signs know only certain people can enter an area.

Just as much as we pay attention to and abide by these restrictive signs, charitable organization are required to abide by donor restrictions on charitable gifts. Of course, it would be much easier to identify contributions as restricted if they were bright red or yellow signs, but they are not.

Donor Restriction Definition
The restriction by the donor is typically communicated to the organization in writing, and it is the organization’s responsibility to track the receipt of donor-restricted contributions and the use of those funds for the purpose the donor designated.

Types of Charitable Contributions
Let’s take a step back and gain a better understanding of the two different types of charitable contributions:

1. Not-donor restricted or unrestricted gift: This is when a donor gives to a charitable organization without stipulating any purpose or time restriction on the gift.

  • For example, donor A supports the cause of an organization by sending them a check with no explicit purpose stated in their accompanying letter or the check itself.

2. Donor-restricted gifts: There are 3 ways a donor can restrict a gift. The gift can be restricted for the purpose, time, or endowment.

A. Purpose restriction is when a donor stipulates a gift must be spent on a specific task, program, activity, etc. of the organization.

  • Example: Donor B gave a gift of $10,000 to a private school, and the donor stipulates in a letter accompanying their check that the gift must be used for tuition aid. Therefore, the gift must be used by the organization to support student tuition aid, for example providing a scholarship to a student.

B. Time restriction is when a donor stipulates when the gift can be used at a specific time.

  • Example: Donor C gave a gift of $5K to a soup kitchen, and the donor stipulates in a letter accompanying their check that the gift must be used in the upcoming calendar year. Therefore, the organization cannot use this gift to support the operations of the soup kitchen until the following year.

C. Permanent restriction is when a donor stipulates the gift must be used kept in perpetuity (forever), but the earnings can be spent by the organization.

Note: It is important for an organization to also track if the earnings on the permanently restricted gift must be used for a specific purpose, as specified by the donor.

  • Example: Donor D gave a gift of $15K to a local church, and the donor stipulates in a letter accompanying their check that the gift must be invested in the church’s endowment fund. Therefore, the organization must invest the funds in its endowment fund to earn and spend in accordance with the organization’s endowment policies.

Donor-Restricted Gifts Restrictions
By receiving a donor-restricted gift, the organization is agreeing to the terms (restrictions) the donor has stipulated. This is a legally binding agreement between the organization and its donor. Therefore, it is important for organizations to not only internally track restricted gifts and the use of the gifts, but also to ensure the organization fully understands the donor’s restrictions. An easy method to confirm the organization’s understanding of the restriction on a donor gift is to send a thank-you letter to the donor that states the restrictions on the gift.

Tracking Is Vital for Reporting
When tracking the receipt and use of donor-restricted gifts, there is no wrong way to track it. The method of tracking can be as basic as an Excel spreadsheet and as advanced as creating funds within the organization’s general ledger system.  Regardless of the method of tracking, the organization should be tracking throughout the year.

What to do with Unusable Donor-Restricted Gifts
If the organization has determined it is not possible or not probable for the organization to use a restricted gift for its donor stipulated purpose, the organization must reach out to the donor and request the donor allow the organization to use the gift in a different manner. If the donor is no longer able to be contacted, the organization must petition the court to approve a modification of the restriction that will enable the organization to use the donor-restricted gift in a manner not originally stipulated by the donor.

The board or management of an organization is allowed to earmark unrestricted gifts for a purpose, but the funds that are earmarked are not considered donor-restricted, as only the donor can restrict a gift.  If an organization would like to show that funds are earmarked, they can be presented as board designated-unrestricted funds to users of their financial statements.

Always Follow Non-Profit Gift Guidelines
By properly using your donors’ restricted gifts, you are not only abiding by the law, but you are also helping increase your donor loyalty and support.  Therefore, regardless of who the donor is or the size of the gift, treat every gift with the same respect for your donors’ wishes. For more information about fundraising and non-profit donations, contact your advisor for further details.

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