Question

Describe and illustrate the kinds of restrictions that donors may impose on the use of resources they contribute to nonprofits.

Answer 1

All contribution revenue received by nonprofit may be classified as either: unrestricted, temporarily restricted or permanently restricted. The existence of restrictions is determined by "donor-imposed" restrictions, internal restrictions (such as Board designated funds) are considered unrestricted. A restricted contribution is a contribution that comes with a specific condition or restriction imposed by the donor. The organization must use a restricted contribution for the purpose specified by the donor. For example, a donor may give a contribution specifically for the purchase of a capital asset or for use in a specific type of program. Failure to do so would typically result in the funds being refunded to the donor.

• Permanently restricted support includes all contributions, which are not expendable by the nonprofit. Some donations you receive can never be used. This intentional permanent restriction means that although the money is legally owned by the nonprofit, you must set these funds aside, as they are not to be spent. The permanently restricted funds should be used as an investment, and any residual income, such as interest, can be spent.
  • The most prevalent example of this is an endowment fund. Typically the organization is not able to use the principal but is able to use the investment earnings.
  • The earnings on permanently restricted funds may be further restricted for use for a given purpose, thus resulting in temporarily restricted revenue.
• Temporarily restricted consists of contributions with donor-imposed restrictions that limit the use of the funds as follows:
  • Purpose-restricted: You may also experience restricted donations tied to specific purposes. In most cases, this is tied to your mission. Donations may be restricted for certain uses only, such as purchasing canned goods (for a food shelter), vaccines (for an animal shelter), or books (for after-school reading programs). The restriction can be for administrative uses, too. A donation can be limited for the use of an administrative assistant’s salary or consulting services in the development of a long-term plan.
  • Time-restricted: You may receive other donations that you can only spend after a certain amount of time. This means you have to wait until a certain date (cannot be spent before January 1 of next year) or passage of time (within six months). In both cases, your nonprofit is awarded money; you just have to secure, track, and ensure the funds are not spent until the appropriate time.
• Unrestricted support consists of all other revenue, Any money given without stipulations is considered unrestricted. This money can be spent in any way you want; there is no legal limit on how, where, or when you spend it. By default, any donation or grant that does not meet the qualification as permanently or temporarily restricted is considered unrestricted.