Restricted Donations Nonprofit Law

By Wayne Thomas

Donations are critical to the survival of most nonprofits. For that reason, it is not uncommon for charitable organizations to reach out potential donors in times of financial need. In these instances, donors may be persuaded to provide support in exchange for some assurance that the money will be used solely for the requested purpose. Placing restrictions on the donation helps serve this objective, with the restrictions being either temporary or permanent in nature.

Donations are critical to the survival of most nonprofits. For that reason, it is not uncommon for charitable organizations to reach out potential donors in times of financial need. In these instances, donors may be persuaded to provide support in exchange for some assurance that the money will be used solely for the requested purpose. Placing restrictions on the donation helps serve this objective, with the restrictions being either temporary or permanent in nature.

Characterizing the Donation

Donations received by a nonprofit organization can be either unrestricted, temporarily restricted or permanently restricted. Unrestricted donations can be used for any purpose consistent with the mission of the nonprofit. Temporarily restricted donations and permanently restricted must be used for a purpose stated in the gift instrument. The gift instrument is a document describing the required use of the funds, and is often in the form of an award letter from a foundation or letter from a single donor. The decision to place any restriction on the award is at the donor's discretion and is often in response to the nature of the request from the nonprofit.

Ready to form a nonprofit? Get Started Now

Temporary Restrictions

Funds donated to a nonprofit may be temporarily restricted. Temporarily restricted funds may be either time restricted or purpose restricted. If the donation is time restricted, the funds must be used in a specified manner for a period of time. An example would be a grant of $25,000 for two years to provide operating support to a nonprofit. Purpose restrictions limit the use of donations to support a particular objective. An example would be a grant of $25,000 to support the renovation of an athletic facility for a nonprofit basketball camp. For both types of temporary restrictions, after the time period passes or the purpose has been completed, the funds become unrestricted and can be used for any purpose that conforms with the mission of the nonprofit.

Permanent Restrictions

A donor may place a permanent restriction on funds donated to the nonprofit. In contrast to temporary restrictions, permanently restricted donations use the interest accumulated on donated funds as financial support for an indefinite period. Provided the nonprofit uses the funds in a manner specified in the gift instrument, the funding is theoretically forever. An example would be a donation of $50,000 to be held by a nonprofit summer camp with the annual interest generated being used to support scholarships for low-income campers.

Management

Certain accounting measures must be taken regarding temporary and permanent restrictions on donated funds. While the limitation is in effect, restricted funds should be kept in a separate account, to avoid misuse or commingling of the donation. For temporary restrictions, once the time period has been met or purpose achieved, the restriction is "released" and the funds are to be transferred to an unrestricted account. Special accounting considerations apply to multiyear grants, which require release of funds on an annual basis. For example, for a four-year $100,000 operating grant, $25,000 would be released and transferred each year, regardless of when the funds are actually expended.

Ready to form a nonprofit? Get Started Now
Non Profit Donation Rules

References

Related articles

How do I Accept Donations on a Pending 501(c)(3)?

Although not required to operate, obtaining federal 501(c)(3) tax status allows nonprofit organizations to accept donations that are tax deductible to the donor. The application process can be started at any point following incorporation and it generally involves several months of review by the Internal Revenue Service. In addition, retroactive tax deduction for donors is authorized by the IRS in certain instances, and nonprofits can use a fiscal sponsor for donations in advance of receiving 501(c)(3) status. An organization may qualify for exemption from federal income tax under 501(c)(3) if it is organized and operated exclusively for one or more of the exempt purposes under the Internal Revenue Code, such as for religious, charitable, scientific, public safety, literary or educational purposes, or for the prevention of cruelty to children or animals.

What Is a In-Kind Donation 501C3?

A 501(c)(3), or non-profit, is an IRS approved organization that has a charitable, religious, public safety, or educational purpose. The benefit of qualifying as a nonprofit is that the organization does not have to pay taxes on the money it receives and donors to a 501(c)(3) can deduct the amount of their gifts from their taxable income. As a result, classifying and measuring the amount of donations, such as in-kind donations, can be an incredibly important part of preparing an entity’s tax return.

Rules for Contests in Nonprofits

Contests are a popular way for nonprofits to raise funds, promote their mission and collect new names for their mailing lists. Although a complex array of state, federal and even international laws imposes limits on contest activity, nonprofits also enjoy certain legal advantages. A well-designed set of rules is not only essential, it can also help a nonprofit avoid substantial problems.

Doing the right thing has never been easier.

Related articles

Non-Profit Requirements for Non-Cash Donations

Encouraging donations is an important part of ensuring the success of a non-profit organization. In order to avoid ...

State Statute of Florida on Raffles & Charities

Fundraising is critical to the success of charities and other nonprofits. Games of chance, such as lotteries and ...

How to Accept Property Donated to a 501(c)3

The Internal Revenue Service has strict rules governing donations of non-cash property to tax-exempt nonprofit ...

What is the Difference Between a 501C3 & 501C4?

Many nonprofit organizations are created for the purposes of providing some benefit to the public. Depending on the ...

Browse by category