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By Anna Melissa Price Of Jenkins Fenstermaker, PLLC on 02/11/2021
Permissible Uses of Charitable Gifts: What are the limits on charitable spending?

Nonprofits are subject to limits on charitable spending, and understanding those limits is vital for charitable organizations. Misappropriating nonprofit funds—even if an innocent mistake—can expose a charitable organization to the risk of litigation by donors and investigation by the state’s attorney general. With guidance from an experienced attorney for charitable giving, charitable organizations can determine how to allocate gifts in the ways that best suit their philanthropic purpose and meet donor expectations.

Types of Permissible Uses of Charitable Gifts

Gifts to charities can made two ways:

  • A cash donation, or;
  • An in-kind donation, which is the transfer of any type of asset, such as goods and services.

Regardless of the form of the donation, the permissible uses of charitable gifts by a nonprofit depend on whether the donations are restricted gifts or unrestricted gifts. Restricted gifts to charities are funds that are set aside for a particular purpose by a donor. Charities are limited to using those funds only for that purpose. Per a donor’s wishes, restricted gifts could be for a specific purpose, such as designating funds for a special project, or for use within a certain period of time. Restrictions on gifts to charities can also be permanent or temporary, depending on the donor’s instructions.

Unrestricted charitable gifts, on the other hand, are donations that a nonprofit can use for any of the organization’s purposes. For example, a cash donation could be used for any of the organization’s expenses or philanthropic pursuits, and an in-kind donation could be retained and used or sold, with the cash being used to meet any of the organization’s needs.

A nonprofit can specifically request unrestricted gifts when soliciting donations. Charitable organizations generally prefer unrestricted gifts because then they are free to choose how to spend the funds, such as for operating expenses like rent, utilities, or employee salaries, or for a particular project.

A nonprofit cannot borrow from restricted funds to pay for something for which the funds have not been designated. It is a good idea to establish an account for restricted gifts to charities to keep them separate from unrestricted gifts. A commingling of restricted gifts and unrestricted gifts could inadvertently lead to misappropriating nonprofit funds.

Nonprofit Overhead Spending

“Overhead” refers to a nonprofit’s administrative expenses. They are the indirect costs that are necessary to run the nonprofit. Overhead expenses can include the cost of personnel and fundraising expenses, such as salaries, professional consultants, and special events. There are no legal requirements as to how much a nonprofit can spend on overhead. However, watchdog groups such as Charity Navigator and Charity Watch monitor the overhead spending of nonprofits to ensure they are not overspending.

It is understood that nonprofits are granted tax-exempt status on the condition that they spend responsibly, but there is no specific limit on nonprofit overhead spending. The extent of such expenses typically depends on the type and size of the nonprofit. Donors can do research to determine the overheard spending of a nonprofit before deciding whether to make a donation to a particular organization.

How to Obtain Tax-Exempt Status

A nonprofit needs 501(c)(3) status for donations to qualify as tax-deductible and makes the organization exempt from income taxes. However, tax-exempt status also subjects the nonprofit to limits on charitable spending.

To be tax-exempt under 501(c)(3) of the Internal Revenue Code, an organization can only operate for exemption-qualifying purposes. A nonprofit does not, however, have to operate exclusively for a charitable purpose. A nonprofit can be formed to promote social welfare, sports, civic improvement, among many other objectives.

West Virginia nonprofits are required to register with the West Virginia Secretary of State, regardless of whether the nonprofit is based in West Virginia. Anyone who solicits on behalf of the nonprofit must register as well. Similar nonprofit registration requirements exist in Ohio and Kentucky. Speaking with a West Virginia attorney for charitable giving who is also licensed in Kentucky and Ohio can help charitable organizations in these states gather the necessary information to comply with the federal and state requirements.

If you are looking to form a nonprofit, you are a nonprofit that needs to know more about the permissible uses of charitable gifts, or you are looking to make a charitable gift to a nonprofit, consult an experienced West Virginia attorney for charitable giving. Also licensed in Kentucky and Ohio, Anna M. Price at Jenkins Fenstermaker, PLLC is a WV wealth planning attorney, who can help WV, KY, and OH residents figure out the permissible uses of charitable gifts. Contact Anna by calling (304) 523-2100 or by completing the firm’s online contact form.