How Do I Handle A Donation When The Donor Has Restrictions?

What if you receive a donation with a letter/memo indicating it is for a specific purpose?  This is called a donor restricted gift.  It typically happens because donors are saying thank you.  They have been impacted through a specific activity or part of your mission and want to express that appreciation. 

What should you do?

First, review your budget to see how much you have budgeted for this purpose.  If your budget is more than the amount the donor has given, then you have fulfilled the restriction because you spend the “specific” donor restricted dollars first.  (Accounting reporting standards guidance says that if you fulfill the restriction on a gift in the year it was received, you can treat it as unrestricted). 

Next, if it’s a restriction that aligns with your goals/priorities but is not in your budget – you can receive the gift and you must track it separately as a donor restricted gift.  At all times you should know the balance of those funds and you have an obligation to track unfulfilled restrictions until they are met. 

Lastly, if the gift is not something you can fulfill, you will need to discuss the gift with the donor.  In my experience, people give with a heart to support the mission and are typically not trying to give conditionally.  Your conversation can share the vision and financial needs you have, as well as how you would like to be able to spend their gift.  Most of the time the donor will affirm their support of the organization and remove any “restrictions” from the gifts. 

In rare cases, the donor will have a narrow definition of how they want the gift to be used.  In those cases, you may need to evaluate with your board and decide whether it's appropriate to accept that gift.  The IRS considers that to be a conditional gift and it does not meet the definition of a tax-deductible contribution.