What Are the IRS Rules on Restricted Donations?
Understand the IRS rules and legal duties connecting a donor's specific charitable goals with a nonprofit's responsibility to manage the funds.
A restricted donation is a contribution to a nonprofit organization that the donor has specified must be used for a particular purpose. This stands in contrast to an unrestricted gift, which the charity can use for any of its legitimate needs, such as general operating expenses.
These donor-imposed stipulations can take several forms. A common type is a purpose restriction, where funds are earmarked for a specific project, like a new building wing, a scholarship fund, or a particular research initiative. Another form is a time restriction, where the gift cannot be used until a future date or a specific event has occurred, allowing the contribution to grow as an endowment.
Creating and Documenting a Restricted Gift
For a restricted gift to be honored, the donor’s intent must be communicated with clarity. The most reliable method for this is a formal, written gift agreement, as ambiguity can lead to disputes.
This written agreement should detail the terms of the donation. It must include the full legal names of the donor and the recipient charity, the date of the gift, and a precise description of the donated asset. The document needs a clear statement defining the restriction, such as “to be used exclusively for the purchase of new playground equipment for the charity’s after-school program” instead of a vague directive like “for the children.”
A poorly worded restriction, such as “to help the homeless,” is open to broad interpretation by the charity. A more effective restriction would specify “for the sole purpose of providing hot meals at the charity’s downtown shelter.” This precision minimizes the risk of the charity redirecting the funds for other purposes.
Finalizing the gift agreement involves both the donor and an authorized representative of the charity signing the document. Donors should retain a copy of this agreement for their records, as it is a separate document from the tax receipt they will later receive from the organization.
IRS Substantiation and Donor Tax Deductions
To claim a tax deduction for any single charitable contribution of $250 or more, a donor must secure a contemporaneous written acknowledgment from the recipient organization. A canceled check or bank statement alone is not sufficient proof. The term “contemporaneous” means the donor must receive this acknowledgment by the earlier of the date they file their tax return for the year of the donation or the due date for that return.
The written acknowledgment must include:
- The name of the charity.
- The amount of the cash contribution.
- A description of the property for non-cash gifts, though the charity is not required to assign a value.
- A statement confirming whether the charity provided any goods or services in exchange for the contribution.
- A good-faith estimate of the value of any goods or services provided.
When a donor makes a non-cash contribution valued at over $500, they must file IRS Form 8283 with their tax return. For donations over $5,000, the charity must also sign Form 8283, and a qualified appraisal is required.
The tax deductibility of a restricted gift follows the same principles as an unrestricted one. The donor’s deduction is limited to the extent that their contribution exceeds the value of any benefits received in return.
A Charity’s Fiduciary and Reporting Duties
Upon accepting a restricted donation, a nonprofit organization assumes a legal and fiduciary responsibility to honor the donor’s stipulations. To manage this, charities must track these funds separately from their general revenue and classify them as “net assets with donor restrictions” in financial statements.
Funds designated for a new research lab cannot be legally used to cover payroll for administrative staff. The restriction legally walls off the donation, protecting it for its intended purpose.
Circumstances can arise where fulfilling a donor’s restriction becomes impossible, impractical, or unlawful. For example, a donation might be restricted to a program that the charity is later forced to discontinue. In such situations, the charity cannot simply decide to use the money for something else and must follow a legal process to modify the restriction.
This process is often governed by a legal doctrine known as cy près, which translates to “as near as possible.” Under this doctrine, the charity may seek approval from a court to find an alternative use for the funds that aligns with the donor’s original intent. In many jurisdictions, the state attorney general must be notified, and proactive communication with the donor is a recommended practice.