One of the things you learn quickly when starting and operating a 501 (c) (3) organization is that you need to handle money wisely. A non-profit organization is no different from any other business in that it must make ends meet. Otherwise, your charity will cease to exist. The current economic difficulties make this task even more challenging, as we are all stretching the dollars until they are transparent.
But here’s a question you probably haven’t considered: In all your efforts to keep the lights on, could it be that you are unknowingly embezzling funds? Is it possible that he is even committing a crime? If you don’t understand what the IRS requires regarding designated funds, you may.
I can’t begin to tell you how many times we see this situation screwed up. Most of the time, it is an innocent attempt by a board or CEO to be good stewards of the money people have donated.
For example, suppose things are going well in the old soup kitchen. There is not enough cash in the general operating fund to buy all the food that is needed for the upcoming holiday season. However, there is a good amount of cash in the fund designated for the construction of a new facility. And, in truth, food shortages are a much more urgent need. It is unlikely that a construction project will start for at least two years. Is it okay to divert some of the money from the construction fund to the food fund?
Maybe or maybe not.
Two Types of Designated Funds Understanding that there are two types of designated funds (or donations), solicited and unsolicited, is the first step in getting this right. Let’s take a look at each one:
Requested designations. An application means that your organization has requested donations for a particular cause. Maybe it was by letter, email, website, radio ad … it doesn’t really matter. What matters is that donations given in response to a direct request are permanently dedicated to that purpose. In our soup kitchen example, the board cannot move that money, no matter how dire the circumstances, if those funds are the result of a request. Last week, many of you may have read the story of the head of a large national charity who resigned after it was discovered that he did exactly this. Was it for a good reason? Yes. Was it illegal? Unfortunately yes.
Unsolicited appointments. These are donated funds that the donor designates without being requested by the charity. For example, Bob decides to donate $ 100 to the local soup kitchen, but decides on his own to “designate” those funds to be used for future expansion. In this situation, can the charity legally divert that money to its food fund? This may surprise you … but the answer is “Yes!” In fairness, there are certainly times when it is politically expedient to honor an unsolicited designation, but the key point is that only the charity itself can tie strings to the donation. This news is often a relief to charities that have struggled to deal with these situations.
One more point about requested designations … there are ways around this problem. First, provide a disclaimer with your request that the organization reserves the right to move money as it sees fit. However, funds received in excess of the budget for the requested purpose will go to the general fund. In a situation where it is too late for a disclaimer, you can go back to the donors and ask for permission to donate again. Note that they have the legal right to say no, although that is unlikely in most legitimate situations of need.
Managing the finances of a non-profit organization is always a challenge. Knowing how to properly address designations is crucial to staying out of trouble with your donors … and the law.