Local government
Article

Considerations for accepting donations

Authored by: Jodi Dobson, CPA, Partner and Susannah Filipovic, CPA, Manager

During times of economic uncertainty, communities often band together to support one another. Local governments may be offered donations to assist with funding community programs. Due to the nature of these types of monetary collections, they are more susceptible to misappropriation. Below are some key considerations for local governments related to accepting donations.

Follow charitable contribution rules

In order to accept donations, a government entity must be considered a qualified organization to receive charitable donations under IRC Section 170(c)(1). The contribution must be “for the use of a state, a possession of the United States of the District of Columbia, made exclusively for public purposes1.” Further, under IRC 170, a charitable donation must be a gift whereas the donor does not receive anything of value for the contribution.

Local governments must follow IRS guidance to issue a written acknowledgement of any charitable donation of $250 or more.

Understand any restrictions imposed by the donor

Local government spending is limited by statutory authority. Be cautious of accepting donations that are not related to programs, activities or projects that the local government is currently participating in. Some donor restrictions may be too burdensome to meet or may steer a current project in a different direction than the governing authority had decided. Local governments should not feel obligated to accept contributions if the restrictions will be too challenging to accommodate.

Maintain proper accounting records

Tracking charitable contribution receipts and the allocation of the donations, if restricted, should be accomplished through the local government’s current accounting ledgers. Separate tracking files may be used for various donations, if desired. Consider creating specific general ledger accounts to track receipts and disbursements to ensure you can support the proper use of donations. 

Consider the impact on the annual budget

The receipt of a large donation and the subsequent spending of the gift may cause the account to be overspent when compared to the entity’s annual budget.

Uphold segregation of duties over donations

Ideally, there would be segregation of duties over the donation collections. Larger amounts are likely accompanied by a request for a receipt from the donor for tax purposes, and funds are generally provided via check rather than cash. However, there is always a risk that donations are not accounted for properly. We recommend that local governments consider having donors send contributions directly to their financial institution to mitigate this risk and improve current segregation of duties. Expenditures related to the donations should flow through the local government’s approval process as well.

Sources:

1 https://www.irs.gov/pub/irs-tege/eotopice85.pdf

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

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