Recently, I received a consulting call to help someone set up bank sub-accounts and classes to track restricted funds. As we jumped on the call, I noticed immediately that there were dozens of restricted funds, and many of those had very small balances in the hundreds. This prompted me to ask a question, “Who is setting the standard for what restrictions or restricted gifts you will accept?” Well, this sparked a great conversation! This particular nonprofit was so inspired by our conversation that we agreed I needed to share it on this blog so many of you could also benefit from the value. I’m excited to share some of the best practices that we discussed in our call that day!

Your board should define the areas of restricted giving that you will receive. 

     It's essential that your board defines the restricted areas where donors can allocate their contributions. Here's a few reasons why:

•   This approach not only provides clarity, but it also ensures compliance with the IRS guideline. To qualify as a tax deductible gift, donations have to be given without strings attached. When your board defines where you'll receive a restricted gift, it helps you to comply with that IRS requirement.
•  Restricted areas are best used for initiatives that are outside of your normal operating budget. A few examples would be building projects or outreach programs that are unique to your nonprofit. 

There is a difference between a gift that is earmarked and a gift that actually creates a restriction that will need to be tracked. 

     Donors often write checks with memos that reflect the area of your nonprofit that most benefited or impacted them. In the church world, you often see “youth’ or “children’s” written in the memo line. These notations typically come from a place of great generosity and gratitude for what you've done, for how this nonprofit has actually impacted that family or that individual's life. So often these check memos aren't actually intended to create a restricted gift. They're really just a donor's way of saying, “Hey, I appreciate you.” 

The GAAP (Generally Accepted Accounting Principles) Standard for Restricted Funds

     So, what is the GAAP standard? If a contribution with a donor imposed restriction is met in the same year as the gift is received, it can be classified as “without donor restrictions.” So basically, if you meet the restricted purpose (the earmark in the check memo), within the year you receive the gift, then you don't have to track the restriction. 

     Here's a very practical application. (Keep in mind, if you spend more than the amount of the check for the purpose indicated on the memo, then you've essentially already fulfilled that purpose.)

     For example, let’s say you have a $200 gift that says “children’s ministry"and your children's ministry budget is $20,000 for the year. Apart from that $20,000 budget, you also have children's ministry staff on salary. Well, in this instance, we can clearly say that this $200 gift has been fulfilled and it can be recorded as an unrestricted gift. 

     As a side note, if you have a donor who does this on a repeating basis, I find that it's helpful to go ahead and have a conversation with them. This phone call to them could sound something like, “I noticed that your gifts say children's ministry in the memo. Can you share a little bit more with me about that? Then, after hearing their great story of how wonderful children's ministry has been for them or their family, or their serving capacity at your church, then you can go ahead and continue on in the conversation to just express that the generosity of the people is what funds all of your missions and ministries and let them know that their gift doesn't have to be earmarked. It can be given generally, and it will be stewarded well, as your organization has demonstrated a high level of trust and transparency  by sharing your budget, and doing things that let people know how their gifts are helping to fund each and every one of your ministry areas. 

When Do You Have to Treat the Check Memo as a Donor Restriction? 

     What if you receive a gift earmarked for an area that actually exceeds your annual funding for that area? While this is rare, I do have a client in this situation who has received a generous gift earmarked for college ministry. Since the gift is larger than their annual college ministry budget, they do have a tracking responsibility. Phone calls to educate donors and to invite gifts to become general are not unheard of, but they do have to be navigated delicately at the right times. 

Review: Which Nonprofit Donations Are Restricted Funds? 

     This conversation clarified my client's understanding of what truly constitutes a restricted fund. And here's where they landed. He said, “I got it! So the donations for our Wednesday night meal are not restricted. However, a gift towards our church goal to build a home for a family in our community is a restricted gift.” He got two thumbs up from me! He got it! He felt incredibly empowered to not only account for these gifts better, but to track them in a way that they can seen transparently and managed effectively. 

     I hope this helps you too! If I can help you with this specific situation in your nonprofit, don't hesitate to book a consulting call. I'd be happy to help you explore what might work in your nonprofit.