BLS Insights

Restricted Vs. Unrestricted: The Battle of Contributions

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Restricted Charitable Contributions I remember as a kid having restrictions on everything I did. I can still hear my mom’s voice in my head saying “Don’t sit too close to the TV,” “No dessert until you eat all of your vegetables,” and the infamous “You can’t play outside until you finish your homework!” As kids, we never thought when we grew up that we would encounter restrictions on a daily basis. Nonprofits are no exception as they deal with restrictions all the time, especially when they receive contributions from donors.

“Charitable Contributions” is an everyday term that almost all nonprofits, as well as avid tax deduction seekers, familiarize themselves with. For many organizations, it is a primary source of revenue. Contributions can come in many forms, and with various stipulations. But what does it actually mean to receive a “restricted” contribution?

Contributions are classified as either restricted or unrestricted. Unrestricted contributions are donations received by an organization that may be used towards any purpose they see fit. Restricted contributions are donations received by an organization in which the donor restricts the use to a particular purpose. One of the most common mistakes made by nonprofit organizations is confusing unrestricted board-designated donations with donor restricted contributions. For example, unrestricted donations are sometimes received by nonprofit organizations and designated by management or the board for a particular purpose. When it comes time to account for these donations, organizations sometimes erroneously record them as restricted support to keep track of their designation. Let’s not forget that time can also be a restriction. Instead of limiting a donation’s use to a distinct purpose, a donor can require the funds be used after passage of time or during a particular time period.

Let’s see if these examples help.

Example 1: John Doe makes a $10,000 donation to an approved charitable organization. The check is accompanied with a letter stating that the donation is to be used for research. The donation is considered to be restricted for a purpose. If the restriction requirements are met during the same fiscal year, it is then considered to be unrestricted.

Example 2: John Doe makes a $10,000 donation to an approved charitable organization. The check is accompanied with a letter stating that the donation must be used for the following fiscal year. The donation is considered to have a time restriction.

Example 3: John Doe makes a $10,000 donation to an approved charitable organization. The check was not accompanied by a letter. Management has determined that the funds be used for a specific project. The donation is not considered to be restricted, but has a board designation.

Remember that sometimes donors are looking for a return in their investments, in the form of their contributions being used for a specific purpose. No matter the purpose, only the donor has the right to set a restriction on a contribution, not the nonprofit. This is an important point to consider because you don’t want to get in trouble for not following the rules which Jon Moll discussed in an earlier post The Risk of Not Honoring Donor Restrictions.

Photo by Vicki & Chuck Rogers (License)

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Private: Belfint CPAs

Belfint CPAs

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