During tough economic times, an increasing number of not-for-profit boards may feel pressured to accept various types of complex funding sources in order to meet their fundraising objectives. A number of these may lead to accounting complexities, donor management issues, and other unforeseen costs.
Knowing what to expect before your organization pursues more complex funding sources can limit your exposure to unnecessary financial and operational difficulties. Below is an overview of the most common types of complex funding sources to be aware of:
Restricted Contributions
Individuals, corporations or private foundations may often restrict the use of their gift on a temporary or permanent basis. These gifts are typically not intended for general operations or administrative and fundraising costs, but there is often a significant cost associated with tracking this income. Therefore, the gift should be large enough to merit the additional monitoring expense.
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Donor-Advised Funds
Some funding organizations allow individual donors to provide advice as to how grants of their funds will be made. However, this practice can lead to issues with tax-deductibility and appropriate accounting.
To avoid these issues, foundations and other funding organizations hosting donor-advised funds should make sure prospective donors understand the limits of their influence. Organizations who are recipients of grants from foundations and other funding sources using donor-advised funds should make sure that any understanding with the individual donor is clear prior to accepting funding. This will help avoid any negative impact on the donor relationship.
Government Funding
While government funds typically come with extensive tracking and reporting requirements, the recipient may also be barred from using grant money to manage or administer the programs that the funding was intended to support.
Additionally, if the organization spends more than $750,000* in federal funds each year, it is required to have a compliance audit in addition to the financial statement audit. This leads to increased audit fees, which are not always covered by the complex funding sources.
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Pass-Through Relationships
Many not-for-profits receive donations on behalf of another organization that has not yet received its tax-exempt status. Administrative costs are generally associated with these complex funding sources, for which the host organization may not receive reimbursement. Special fiscal responsibilities also exist that require your nonprofit to use the funds for charitable purposes.
Annual Auctions and Other Fundraisers
It is common for not-for-profits (or someone on their behalf) to host a fundraising event. However, in addition to requiring a significant time commitment from staff and volunteers (and placing the organization at risk for fraud without proper supervision), numerous other accounting and donor perception issues exist. Some of these can even diminish the returns that these events deliver.
In addition to the above, there are other enticing revenue streams and complex funding sources such as land grants and stock gifts that may include unanticipated tax consequences. Your organization should also be cautious about accepting revenue from advertising, parking fees, rent and retail sales. These can lead to additional record-keeping requirements and unrelated business income (“UBI”).
Fortunately, there are ways to protect your organization, including the following:
- Read the fine print on grants and federal funding programs
- Implement a comprehensive gift acceptance policy that establishes gift evaluation, acceptance and acknowledgment processes
- Before hosting a fundraising event, evaluate cost and benefits against required resources
- Always consider how funding sources may or may not align with your mission
Not all money is good money, but with the right set of tools and procedures to determine appropriate funding sources, your organization will feel prepared to proactively assess risk and to simplify decision-making in the future.
[Related: Advertising Income or Sponsorship Contribution?]
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If you have any questions about complex funding sources, or would like to schedule a consultation to see how we can help, contact Jacobson Jarvis today!
