If you’re running a nonprofit or serving on a board, you’ve likely encountered the terms “restricted donations” and “board designated funds.” They sound similar, but they function very differently—and understanding the distinction is critical for financial transparency, donor relations, and long-term planning.
Here’s what you need to know about these two types of donations, and why the difference matters more than you might think.
What are Restricted Donations?
Restricted donations come with strings attached and stipulations from the donor, not the organization. When a donor makes a restricted gift, they’re specifying exactly how that money must be used. Maybe they want their $10,000 to fund your ski program, or perhaps they’re earmarking funds specifically for building renovations. Whatever the case, you’re legally obligated to use that money for the purpose the donor specified. This isn’t a suggestion. It’s a binding agreement.
There are two main types: temporarily restricted funds (for a specific purpose or timeframe) and permanently restricted funds (typically endowments where the principal stays intact but you can use the investment income).
Restricted donations can be a blessing and a burden. They often enable specific programs that might not otherwise be possible, but they limit your flexibility. If a donor restricts $50,000 to your youth sports program, but your organization desperately needs funding for administrative costs or a different program that’s struggling, you can’t redirect that money. It’s locked in, regardless of your evolving needs.
What Are Board Designated Donations?
Board designated funds operate entirely differently. These are unrestricted donations that your board of directors has chosen to set aside for a specific purpose. The key difference? The donor hasn’t placed any restrictions on the funds—your organization has made an internal decision about how to use them.
As a quick example: you receive a $25,000 unrestricted donation. Your board decides to earmark that money for building a new community center. That’s a board designation. The donor didn’t require it, your board chose it.
Here’s what makes board designated funds fundamentally different: your board can change its mind. If circumstances shift and that community center is no longer the priority, your board can vote to redesignate those funds for something else. You have the flexibility to respond to changing needs, new opportunities, or unexpected challenges. From a legal and accounting standpoint, board designated funds are still considered unrestricted. They appear in the unrestricted net assets section of your financial statements, though many nonprofits will note the designation in their financial reporting for transparency.
Why does the Distinction Matter?
The difference between restricted and board designated donations isn’t just accounting semantics—it has real implications for how you run your organization.
When donors make restricted gifts, they’re trusting you to honor their wishes. Failing to do so isn’t just poor practice—it can lead to legal consequences and damage to donor relationships. Board designations, however, are internal decisions. While you should be transparent about how you’re using unrestricted funds, donors who give unrestricted gifts understand they’re trusting your leadership to make the best decisions.
Organizations that rely too heavily on restricted funding can find themselves in a difficult position. You might be flush with cash on paper, but if all of it is restricted to specific programs, you may struggle to cover general operating expenses, staff salaries, or emerging needs. Board designated funds give you breathing room—they allow you to set aside money for future priorities while maintaining the flexibility to pivot if needed.
Your financial statements must clearly distinguish between restricted and unrestricted funds. Board designations are reported as unrestricted, but good practice suggests noting the designation in your financial disclosures for stakeholder transparency.
The Main Takeaway
In conducting audits and preparing Form 990 tax returns, we see many occurrences where organizations use the term restricted and designated interchangeably. Donor restricted funds’ restrictions can’t be released by the board, as these restrictions stem from the original donors’ intentions. Board designations are “restricted” in a sense that these funds must be used based on the boards intentions. However, these designations may be reversed through board decisions, and the capital can be used for other purposes.
While the distinction between these two types of funds is important from an accounting and legal standpoint, it is even more important that leaders understand the distinction between the two for operational purposes.
Need help navigating nonprofit finances, fund accounting, or tax compliance? Lathrop & Associates, CPAs are selectively taking on new nonprofit clients.