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For nonprofits, the most meaningful financial contributions often come with obligations. Many donors specify how their money should be used, whether to fund a specific program, purchase equipment, or support scholarships.

These restrictions may seem straightforward today, but they can create challenges in the future, particularly when the original restriction no longer aligns with current needs. Mismanaging restricted funds, even unintentionally, can lead to compliance issues, damaged donor relationships, and even potential loss of tax-exempt status.

Understanding Restricted vs. Unrestricted Donations

Most contributions fall into one of three categories: unrestricted, temporarily restricted, or permanently restricted.

• Unrestricted funds can be used for any lawful purpose that furthers the nonprofit’s mission, such as salaries, rent, or general operations.
• Temporarily restricted funds must be used for a specific purpose or within a defined time period. For example, a grant to expand community health programs within the next two years.
• Permanently restricted funds (such as endowments) must be preserved in perpetuity, with only the income or interest used for the stated purpose.

Donors may impose these restrictions to ensure their money has a targeted impact. Once accepted, those terms become binding conditions, not suggestions. A nonprofit that spends restricted funds for other purposes risks violating both state law and IRS requirements for charitable use of donations.

The Legal Duty to Honor Donor Restrictions

Under Georgia nonprofit law (GA Code § 14-3-192), directors and officers have a fiduciary duty to use charitable assets consistent with the donor’s intent. That obligation applies whether the gift was large or small. Even when restrictions seem impractical or overly narrow, the organization cannot simply decide to repurpose the funds.

Failing to comply can expose the nonprofit to complaints from the donor or attorney general investigations into misuse of charitable assets. Beyond the legal implications, ignoring restrictions can erode donor confidence and deter future giving.

Proper Accounting and Segregation of Restricted Funds

Compliance depends on maintaining clear financial boundaries. Restricted funds should always be tracked separately from general operating accounts. Many organizations use fund accounting systems that allow each donation or grant to be coded by restriction, with separate income and expense ledgers.

This segregation ensures transparency, simplifies audits, and gives organizations the ability to easily demonstrate that donor funds are being used exactly as promised. Documentation should include copies of any donor correspondence, grant agreements, and internal memos describing how the funds will be applied. If the restricted project involves long-term or capital expenditures, the nonprofit should also establish reporting timelines to confirm compliance over time.

When Circumstances Change

Sometimes, circumstances make it impossible or impractical to fulfill a donor’s restriction. The project may have ended, the specified equipment may no longer be available, or the community’s needs may have shifted. Even in these cases, the nonprofit cannot simply redirect the money.

The first step to legally repurpose funds is to contact the donor, explain the situation, and request written consent to modify or remove the restriction.

When the donor is deceased, unavailable, or the gift terms prohibit modification, Georgia nonprofits can petition a court to apply the cy pres doctrine. This legal process allows a judge to adjust the restriction so the funds can be used for a purpose as close as possible to the donor’s original intent.

Documentation is essential at every step. The board should record all communications and decisions in meeting minutes to show that it acted in good faith and sought proper authorization.

Handling Grant Funds With Conditions

Grant funding often comes with its own set of restrictions, ranging from eligible expenditures to reporting deadlines and measurable outcomes. Unlike individual donations, these terms are usually contractual. Failure to comply can result in having to repay the funds, losing eligibility for future grants, or even breaching a legally enforceable agreement.

Before accepting any grant, nonprofits should confirm they have the capacity to meet the stated requirements. That includes staffing, recordkeeping, and the ability to document how funds were spent. Many grantors expect periodic progress reports and reserve the right to audit. Keeping detailed documentation protects both the organization and its leadership.

How a Nonprofit Attorney Can Help

Restricted funds require careful oversight, and even well-intentioned organizations can stumble on technicalities. A nonprofit attorney can:

• Review and draft clear gift acceptance policies.
• Examine donor and grant agreements before acceptance to identify potential compliance issues.
• Advise on fund segregation and financial reporting procedures.
• Assist with donor consent requests or cy pres petitions if a restriction becomes unworkable.

Because the rules surrounding restricted funds blend donor intent, state nonprofit law, and IRS compliance, it’s best to address potential issues early rather than after funds are spent.

An Atlanta Nonprofit Attorney Can Help You Manage Donor and Grant Restrictions Confidently

If your nonprofit in Atlanta has received restricted gifts or grants and needs guidance on compliance, documentation, or modification, the Law Office of Cameron Hawkins can help. As nonprofit general counsel, our firm advises boards and executives in Georgia on policies that protect both the organization and its mission.

Call (678) 921-4225 or contact us online to schedule a consultation.