June 24, 2022

Designated Giving versus Restricted Giving – what’s the difference?

Category: Administration | Tags: donor restricted giving, giving, recording gifts

Posted by Meagan

Buckle up and break out the pen to take some notes. Or the highlighter if that’s more your style. Because we are about to dive into a pretty specific topic with some very cut and dry rules associated with them. Designated versus Restricted giving.

Before we get any further, please note that just because my name is at the top of this post, most of the wording came from Miller Management training workbooks and the Miller Management Accounting team.

First, make sure you are applying best practices in Offering Counting – before the money. Then you can come back and work on restricted vs. designated giving.

What’s the difference between restricted and designated giving?

Essentially, it comes down to donors can only give restricted gifts. And boards can designate funds. But we can’t reverse those roles. Restricted funds are based on the donor stipulations of the initial gift, and designated funds are created from an internal transfer initiated by leadership.  

Restricted funds are legally required to be used for the purpose they are given for. Restrictions for purpose are typically seen more often in ministries (such as a building fund, missions fund, etc.), but some gifts may be restricted by time as well, such as a permanent endowment. Using amounts in a restricted fund for a purpose different than what they were given for requires either contacting 100% of the original donors to request a change in restriction, or requesting permission from a court (if all donors cannot be tracked down).

Designated funds are amounts set aside for a specific purpose or classification by the organization’s leadership, not a donor. Designated funds can be undesignated and used for a different purpose if agreed upon by that same board or governing body.

How to we record these types of gifts on our financials?

Because restricted and designated funds have different levels of stipulations for how they are used and the requirements for changing the restriction/designation, Miller Management recommends recording them separately on the financial statements, to differentiate what donors have given towards vs. what the church has set aside.

You might also like our End of Year Giving post for how to record giving and when to produce donor statements.

What if someone asks for their donation back?

For donations to be considered tax deductible, the church needs to have full control of the funds. This means that gifts for contribution credit should be considered nonrefundable. Since the nature of tax-deductible contributions require an irrevocable transfer of cash or property to a charitable organization, request from donors to return unrestricted gifts should in most circumstances be denied.  In some instances where a donor has made a restricted contribution, the governing body of the church may deem refunding contributions appropriate. 

For example, if a church raises money for a new church building and then abandons the project, the church should contact the donors and ask them if they want their contributions returned or retained by the church for another purpose.  A letter should be sent to the donors who request a refund informing them that they need to consult with their tax advisor about filing amended tax returns to remove any deduction claimed during the previous years as a result of their restricted contributions. Churches should have policies in place to address requests for the return of restricted charitable donations, and should carefully consider all facts, consulting with legal counsel if needed.

Hot Tips from the A Team

The Miller Management Accounting Team – affectionately called “the A Team” – has provided some hot tips surrounding this topic. The following notes are not legal requirements or official recommendations, but some tips that might be helpful in managing restricted and designated funds:

• Consider recording expenses against donor restricted funds before board designated funds, since the restricted funds have stricter legal requirements if the balance remains unused.  
• If the organization chooses to create a new restricted fund, consider keeping the purpose broader than a specific event or very detailed purpose that may limit the use of excess donations.
  • Please note: if current restricted fund categories are broadened or changed, any current balances will still need to be used toward their initial purpose. Existing funds must be used for the purpose for which they were originally given.
• While there can be benefits to restricted funds, gifts given without restriction will always provide the greatest flexibility for the organization, especially if unforeseen circumstances arise.
• Organizations are not obligated to automatically accept restricted donations (for example, if the restriction does not fit the purpose of the organization, or if the restriction is not an existing program of the ministry).

Congratulations, you’ve made it to the end of the post! If your head is swimming, like mine, don’t hesitate to contact your personal A Team member for specific advice on your organization’s restricted and designated giving.