If you run a nonprofit, you already know that donations and grants are your bread and butter. You also know just how complicated tracking donations can be. Nonprofit organizations are required to know how to track charitable donations they receive and supply donors with the proper documentation for the donations they’ve made.
Read on to learn more about how to track donations for taxes.
How to track charitable donations
Nonprofit organizations use fund-based accounting to keep track of their donations. Fund-based accounting organizes donations into specific funds to make sure that donations are used with a particular goal in mind. Think of a fund as a funnel, it gathers up money and directs it for a specific purpose. The types of funds can change with the nonprofit, but here are a few funds you might come across.
Nonprofit funds can include:
- General funds: The nonprofit’s main operating fund, used for routine expenses. These donations come in the form of grants, gifts, and annual subscriptions. Usually, these are made without donor restrictions.
- Restricted funds: Made from donations with donor restrictions. In other words, donations in a restricted fund can only be used for the specific reason of the fund. Say you’ve created a fund to help pay for lunches during the summer at a local middle school—money put in this fund could only be used for this purpose.
- Fixed asset funds: Used for maintaining or purchasing buildings, property, and equipment. Usually created from special grants, although the general fund can also be used to help out.
- Endowment funds: Generally the result of a gift, endowment funds are maintained forever, while the resulting interest and investment returns are used.
Nonprofit funds don’t necessarily get an equal share of donations. Funds are driven by donations which are first categorized as either with donor restrictions or without donor restrictions. These types of donations used to be known as unrestricted and restricted donations.
Funds help you track both the donations you’ve received (revenue) and how that money is used (expenses). To help track revenue and expenses, each fund should have its own budget. If you precisely manage your fund’s budget and its revenue and expenses, it should be easy to prove that you’re using donations and grants for their intended purposes.
Accounting for donations
Nonprofit accounting is different from for-profit organizations. Instead of income statements, balance sheets, and cash flow statements, nonprofits typically rely on:
- Statement of financial position shows assets, liabilities, and net assets (instead of equity). The statement of financial position helps you understand the financial health of your nonprofit. Make sure to label donations with donor restrictions appropriately. Your net assets and liabilities must balance against your assets.
- Statement of activities reports revenue and expenses for a reporting period. Restricted and unrestricted funds are put into separate columns, while the rows show revenues and expenses.
- Cash flow statements keep track of the money entering and leaving your nonprofit for the reporting period. Cash is organized into three categories: operating, investing, and financing. Cash flow is either positive or negative for your nonprofit
Because of the accounting requirements for a nonprofit, the accrual method of accounting may work best.
Donations with or without donor restrictions
Donations aren’t necessarily available for any fund you choose to put it in. Where the donation goes depends on whether it comes with donor restrictions or not.
Donations with donor restrictions
Again, donations with donor restrictions can be reserved for specific funds or specific periods. Restricted donations can come in the form of grants or individual donations given to specific programs or projects. For instance, if you throw a fundraiser for a future expansion project for your headquarters, the donations you receive can’t be included with your general funds. Instead, the donations from your expansion fundraising event can only be used for that specific project. Once the project is finished, you can release any leftover funds from their restrictions.
There are two types of donations with donor restrictions: temporary and permanent.
A restricted donation is temporary if it is for a specific project or limited time. Funds can become unrestricted or stop altogether when the project is completed or the specified time has expired. Think of the example above. The funds for your expansion project are released once the project is completed. Once this happens, you can use the funds for whatever you like, as they are now without donor restrictions.
Permanent donations are usually set aside as an investment, with only the interest or investment returns being available for use (e.g., an endowment fund).
Donations without donor restrictions
Donations without donor restrictions are available for general use. You can divide these donations between your funds however you see fit. Most of your individual donations will be without donor restrictions.
What you need to know about donations with donor restrictions
Donations with donor restrictions require you to up your bookkeeping game. There are a few things to consider, such as how to designate donations with donor restrictions and how to keep track of these donations in your bookkeeping system.
When you receive a donation with donor restrictions, make sure that you organize all documents about the donation (e.g., award letters or grant agreements). Do your best to keep track of anything that shows the donor’s intent for how their donation should be used.
Pay close attention to how you ask for contributions. The language you use may put restrictions on donations whether or not you want to. If you are seeking general contributions but your marketing points out a specific building project or specific fund, you may find that any contributions received aren’t for the general fund at all. In other words, be very clear when soliciting money and help your donors be clear about their intentions for their contributions.
Make sure you don’t use restricted funds for a non-designated purpose. If you do, your donors could sue you, or you may hear from the U.S. attorney general.
To keep things simple, you may want to use gift intent forms to make sure donations go to the right place. If you choose to make a gift intent form for your donors, be sure to include a space for:
- Donors to write down their personal information, name, phone number, address, etc. This will help you if you have to give them a contemporaneous acknowledgment of their donation
- Checkboxes so donors can note which fund the donation should go to
- Space for donors to designate percentages of their donation to specific funds
- A space for additional notes and/or special or seasonal fundraising
You may also let the donor decide if they want their contribution to be made anonymously.
Whatever they do, make sure that you document things and be sure to send them a contemporaneous letter of acknowledgment if their donation is over $250.
This is not intended as legal advice; for more information, please click here.