What Are Donor Restricted Funds In A Nonprofit?

Nonprofits have unique income principles.  For a donation to be considered tax deductible by the IRS, it cannot be a conditional gift.    Conditional gifts occur when a donor attempts to give a gift to the nonprofit but places their own stipulations on what it is to be used for. 

 In contrast, donor restricted funds occur when the organization defines specific purposes for which they are willing to receive specific donations towards.   This can occur when you are running a capital campaign/building program or when launching a new program for which you will have large startup costs that do not fit in the operating budget.   

Conditional gifts = donor places stipulations = not tax deductible

Donor Restricted Funds = nonprofit opens areas for donors to give to specific purposes 

When you receive donor restricted funds, you will need a method for tracking the receipts and expenditures to fulfill the restriction. It’s best to have an accounting system that can handle this unique accounting and reporting.  At any given time, you should be able to give a report for donor restricted funds that have not yet been fulfilled.  The total of those funds should be listed separately on your balance sheet net assets section.