Nonprofits sometimes get caught up with donor restrictions imposed on donations and how to use these funds to pay expenses. What is the best way to pay expenses using donor restricted funds and remain compliant?
How to Pay Expenses Using Donor Restricted Donations
In order to remain compliant, it is very important to take the time to understand how to use donor restricted donations. Very often we get questions on how a nonprofit can use restricted funds to pay expenses.
Here’s a question asking what is the best way to pay for expenses using restricted funds:
Answer: There is no need to cut separate checks for expenses that are incurred in different funds. The proper allocation of expenses to designated areas only affects the allocation of expenses, not the allocation of cash from checking accounts. It is extremely cumbersome and difficult to split cash activity by fund, and not necessary in the proper presentation of nonprofit financial statements.
Different Types of Net Assets
Unique accounting standards for nonprofits require two categories for net assets:
- With Donor Restrictions
- Without Donor Restrictions
Donor Restricted Donations Options
Donors have the option to restrict the use of their donations through a “gift instrument.” This is a document which spells out how they would like their donation to be used. Previously, restricted funds included “temporarily restricted funds” and “permanently restricted funds.” Donor-imposed restricted funds can restricted to a specified period of time (time restriction) or for specific activities (activity restriction).
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It is essential for record keeping to specify donor restrictions as well as the time that income or commitment of funds is received, regardless of when the associated expenses are incurred.
To account for this, you may have to adjust your nonprofit accounting system to accurately present financials in association with donor restricted funds. By understanding the requirements of reporting net assets, you can avoid unintentionally misappropriating funds.
Nonprofit restricted funds are helpful but not ideal. Occasionally fundraising efforts may solicit funds for a specific purpose. For example, if your organization requests donations for a specific program, you will then be restricted from using these funds for support expenses.
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You may find that your organization will receive grants that require a “use it or pay it back” provision. This can cause problems if you designate funds for a program which is delayed or scheduled for after your fiscal year. Prioritize spending of these funds to avoid having to pay it back if the restrictions are not met.
Stock or investments donations are often restricted and need to be reviewed the your accounting team before they are accepted. There may be restrictions on the investment principle or income. Also, pay attention to special reporting or tax requirements based on the type of gift and specific restrictions placed by the donor.
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Conscientious tracking of funds is crucial in demonstrating accountability and transparency. Directors and managers need proper training to understand the complex issues of restricted funds which are unique to nonprofits. Paying close attention to the requirements imposed on your donor restricted funds, will guarantee compliancy and help your nonprofit better manage its revenue.
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