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A restricted gift tells you exactly what a donor cares about. It also creates obligations your nonprofit needs to document, track, and report.
When a donor restricts a gift to a specific program, project, or time frame, they're handing your nonprofit both money and a promise to keep. Honor the terms, and you build a supporter for life. Miss them, even by accident, and you risk a dispute, a request to return the funds, and a dent in the trust that keeps other donors giving.
What Is A Restricted Gift?
A restricted gift is a contribution a donor limits to a specific purpose, such as a program or building project, a specific time period, or both. Some restrictions are permanent, as with an endowment where the donor requires the original gift to be held indefinitely. When your nonprofit accepts the gift, it accepts the obligation to follow those terms.
Restricted gifts also show up differently in your financial statements. Under the Financial Accounting Standards Board's (FASB) not-for-profit reporting standard, Accounting Standards Update (ASU) 2016-14, they're reported as net assets with donor restrictions until the donor's conditions are met.
One distinction worth keeping straight: money your board sets aside for a purpose is board-designated, not donor-restricted. The board can change its own designations. It can't change a donor's.
What Should A Restricted Donation Letter Include?
A restricted donation letter or gift agreement should spell out the amount, how the gift may be used, any time limits, the reporting the donor expects, and what happens if the original purpose can't be fulfilled. Clear written terms head off disputes and give your accounting team something concrete to track against.
A strong letter typically covers:
- Permitted uses: The program, project, or expense types the gift can fund.
- Timing: When the money may be spent and any deadline for spending it.
- Reporting: What updates the donor expects and how often.
- Flexibility: Whether the nonprofit may redirect funds to a similar purpose if the original one ends.
- Ownership: The staff member responsible for monitoring compliance.
Restrictions don't always arrive in a formal agreement, though. They can hide in an email, a note on a pledge card, or a line in a grant award. Consider training everyone who receives gifts to spot possible restrictions and route that paperwork to both development and accounting staff.
How Should Nonprofits Track Restricted Gifts?
Track each restricted gift from receipt to final spending, linking the donor's terms to the amount received, the expenses charged against it, and the balance that remains. A small nonprofit with a handful of restricted gifts may manage this in a spreadsheet. Organizations with more activity usually rely on funds, projects, or other tracking codes in their accounting system.
A few habits keep any method reliable:
- Review regularly. Confirm that expenses charged to each gift actually fit the donor's terms, and correct any questionable charges quickly.
- Release restrictions on time. When a purpose or time restriction is met, reclassify those amounts from net assets with donor restrictions to net assets without donor restrictions.
- Set reminders. Build a calendar for donor reports so deadlines don't slip.
- Measure results. Track what each gift accomplished. Showing donors their impact is one of the strongest cases you can make for the next gift.
If your team is stretched thin, outsourced accounting support can help keep restricted fund records current between audits.
What If A Restricted Gift Asks Too Much?
Some gifts come with strings your nonprofit can't realistically hold. A donated building you can't afford to maintain, or a program requirement that pulls staff away from your mission, can cost more than the gift is worth. Not every gift is a good fit, and saying so early protects the relationship.
Before accepting a significant restricted gift, consider reviewing the terms against your budget and capacity. If the terms don't work, you can propose different ones or decline the gift altogether.
Can A nonprofit Change A Gift's Restrictions Later?
Usually only with the donor's consent or through a legal process. In Ohio, Ohio Revised Code Section 1715.55 lets an institution release or modify a restriction on an institutional fund when the donor consents in writing. Otherwise, a court may modify it, with the Ohio attorney general as a party. For funds valued under $250,000 that are more than 10 years old, an institution may instead give the attorney general's Charitable Law Section 60 days' notice, if the restriction has become unlawful, impracticable, impossible, or wasteful. Legal counsel should be part of any change.
Put Your Restricted Gifts To Work With Confidence
Handling restricted gifts well, from the restricted donation letter through the final report, turns one gift into lasting donor support. As Ohio nonprofit accountants, GBQ's nonprofit team helps organizations evaluate proposed gifts, build tracking procedures that fit their size, and present restricted funds clearly in their financial statements. To talk through a gift you're considering or the way you track the ones you have, reach out to Scott Eichar or talk to an expert on our team. Empowering growth is only a conversation away.
Frequently Asked Questions About Restricted Gifts
What's the difference between a restricted gift and a board-designated fund?
A donor sets the terms of a restricted gift, and only the donor or a legal process can change them. A board-designated fund is money the board chooses to set aside from unrestricted resources, so the board can reverse that decision.
When is a restricted gift released?
A restriction is released when its purpose is fulfilled or its time period ends. At that point, the amount moves from net assets with donor restrictions to net assets without donor restrictions in your financial statements.
