Frequently, a charitable organization will be offered a contribution with restrictions on the use of that contribution. The gift can be cash or any other asset. The organization is under no obligation to accept the gift with restrictions, but if it does, the donor restrictions must be honored. A distinction should be made between a conditional donation and a restricted one. A conditional donation is predicated on the occurrence or non-occurrence of a specific event. For example, the donor may specify that a contribution will be made to the organization’s building fund if a certain amount of additional funds are raised within a specified period of time. A doctor-restricted contribution may only be used for the purpose specified by the donor. As an example, the donor may make a contribution to a university scholarship fund, specifying that the funds will be awarded only to junior accounting majors with a GPA of 3.0 or higher. The funds cannot be used for any other purpose. In addition, one must distinguish between a restriction and a preference. A donor may say “I would prefer that the scholarship be granted to an accounting major but they must have a 3.0 GPA.” The university now has the freedom to grant the scholarship to someone other than an accounting major, as long as the student’s GPA is 3.0 or higher.
Currently, donor-restricted assets are classified as having temporary or permanent restrictions. Those with temporary restrictions can be used for any purpose once the restriction expires. Permanently restricted funds can never be used for non-specified purposes. It should be noted that it is not permissible to “borrow” restricted funds (temporary or permanent) for other uses, then later “repay” the funds even if they are repaid within the same fiscal year. The restricted assets should always be available for the restricted purpose. Borrowing such funds comes with the risk that adverse conditions will come upon the organization and it well be unable to restore the funds. In addition, using the funds for other purposes breaks faith with the donor.
While the restricted funds do not require physical separation from unrestricted funds, there should be segregation in the organization’s books. Charitable organizations are exempt from income taxes and contributions are deductible by the donor. With these benefits also comes a certain level of financial transparency, as charities are required to disclose their financial records, often through submitting Form 990 to the IRS. This return is available for public viewing and the organization must meet reasonable requests for copies. Copies can be made available on demand or provided through the organization’s website.
Changes are on the way. The Financial Accounting Standards Board (FASB) has issued an Exposure Draft that makes significant changes to not-for-profit reporting, including changes in the three net asset classes (permanently restricted, temporarily restricted, and unrestricted). The Exposure Draft replaces the three categories with two asset classes – net assets with donor restrictions and net assets without donor restrictions.
Additionally, the Exposure Draft mandates that any endowment funds that are “underwater” would be reported within the “with donor restrictions” class of net assets. Organizations would be required to disclose the aggregate amount by which the funds are underwater along with additional disclosures about the original gift amount, current fair value, and organizational spending policies. An asset is considered underwater if its current market value is less than the original value.
While the treatment of donor-restricted funds is a financial accounting topic, financial reports are included as a part of the organization’s Form 990. Transparency in reporting as well as ethical obligations demands that donor restricted assets be handled in a forthright manner and tax reporting is a part of this transparency.
Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.
Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.
He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.
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