Earmarked funds are money that is legally restricted to a specific purpose, so the recipient cannot redirect it to general operations or unrelated projects. The term shows up in two very different places. In government, Congress earmarks appropriations for named projects through legislation. In the nonprofit world, donors attach conditions to their gifts that bind the organization to spend the money exactly as specified. Both create enforceable obligations, both come with auditing requirements, and both carry real consequences when the money is misused.
Restricted vs. Unrestricted Money
The core distinction is straightforward. Unrestricted funds can be spent however leadership sees fit. A city council can move unrestricted budget dollars from parks to road repair if priorities shift. A nonprofit board can reallocate unrestricted donations to cover rent. Restricted funds do not work that way. The money stays locked to its designated use regardless of what the organization would prefer.
For nonprofits, the Financial Accounting Standards Board draws a clear line. Under ASU 2016-14, nonprofits classify all net assets into just two categories: “with donor restrictions” and “without donor restrictions.”1FASB. Accounting Standards Update No. 2016-14 That replaced an older three-category system that split restricted assets into “temporarily restricted” and “permanently restricted.” The two-bucket framework is simpler, but the idea is the same: restricted means the organization cannot touch those dollars for anything other than the donor’s stated purpose.
Restrictions come in two flavors. Some are temporary, expiring once a condition is met or a deadline passes. A grant restricted to a 2026 summer literacy program loses its restriction once the program wraps up and the money is properly spent. Others are permanent. The classic example is an endowment, where the donor requires the principal to remain intact indefinitely and only the investment income can be spent.2FASB. Not-for-Profit Entities (Topic 958) – Clarifying the Scope and Accounting Guidance
Legislative Earmarks in Federal Spending
In the public sector, an earmark is a provision inserted into an appropriations bill that directs federal money toward a specific project, entity, or location. Congress banned earmarks from 2011 through early 2021, then brought them back under new names and tighter rules. The House calls them Community Project Funding; the Senate uses Congressionally Directed Spending.3Congress.gov. Community Project Funding: House Rules and Committee Protocols
When an Earmark Actually Binds the Government
Not every mention of a project in the legislative process carries the force of law. An earmark written into the enacted text of an appropriations statute binds the executive branch to spend the money as directed. Earmarks that appear only in committee report language, which accompanies a bill without being part of it, do not have the same binding effect. Executive Order 13457 directed federal agencies not to commit or spend funds based on earmarks found only in non-statutory language like committee reports.4Congress.gov. Earmark Disclosure Rules in the House In practice, agencies have historically treated report language as strong guidance, but they are not legally compelled to follow it.
Disclosure Rules
Reinstated earmarks come with disclosure obligations that did not exist before the moratorium. In the House, any member requesting an earmark must submit a written statement to the relevant committee identifying the member, the intended recipient’s name and address, and the purpose of the earmark, along with a certification that neither the member nor their spouse has a financial interest in the project. The Appropriations Committee extended the financial-interest certification to immediate family members as well.5U.S. House of Representatives Committee on Ethics. Certification of No Financial Interest in Fiscal Legislation
Members must also post every funding request on a searchable public website at the same time they submit it. For-profit entities are barred from receiving Community Project Funding, and each member is limited to ten requests. The total pool is capped at one percent of discretionary spending, and the Government Accountability Office is required to audit a sample of funded projects.3Congress.gov. Community Project Funding: House Rules and Committee Protocols Senate Rule XLIV imposes a parallel transparency structure, requiring a complete searchable list of earmarks and requesting senators to be posted publicly before any vote.6Congressional Research Service. Earmark Disclosure Rules in the Senate: Member and Committee Requirements
Donor-Restricted Funds at Nonprofits
When a donor gives money to a nonprofit with specific instructions, the organization takes on a fiduciary obligation to honor them. The restriction can arrive through a formal grant agreement, a letter accompanying the gift, or even language on a donation form. What matters is that the donor’s intent is documented and clear. A gift earmarked for a scholarship program cannot be redirected to cover the executive director’s salary, no matter how tight the operating budget gets.
The accounting standards reinforce this. FASB’s codification requires nonprofits to evaluate each contribution for donor-imposed restrictions by considering how narrow the stated purpose is and whether the funds can only be used after a certain date.2FASB. Not-for-Profit Entities (Topic 958) – Clarifying the Scope and Accounting Guidance A restriction on use results either from a donor’s explicit stipulation or from circumstances that make the donor’s intent clear. Once classified as restricted, those funds stay restricted until the conditions are satisfied or formally released.
Accounting and Audit Requirements
Tracking earmarked money takes more than good intentions. Organizations receiving restricted funds need accounting systems that keep those dollars visibly separate from general operating money. Most nonprofits handle this through fund accounting, treating each restricted fund as its own fiscal entity with a distinct trail of receipts and expenditures.
Federal Grant Compliance
Organizations spending federal grant dollars must comply with 2 CFR Part 200, known as the Uniform Guidance. It covers allowable costs, procurement methods, and internal controls. Recipients must establish and maintain internal controls that provide reasonable assurance the award is being managed in compliance with all applicable requirements, aligned with standards issued by the Comptroller General or the COSO framework.7eCFR. 2 CFR 200.303 – Internal Controls Federal procurement standards also apply, so grant money spent on goods or services requires specific documentation and competitive bidding rather than a simple vendor pick. Organizations that pass federal funds through to other entities take on responsibility for monitoring those downstream recipients too.
The Single Audit Threshold
Any non-federal entity that spends $1,000,000 or more in federal awards during its fiscal year must undergo a single audit, sometimes called a Uniform Guidance audit. That threshold increased from $750,000 under the revised Uniform Guidance, effective for audit periods beginning on or after October 1, 2024.8HHS Office of Inspector General. Single Audits FAQs A single audit goes well beyond a standard financial audit. It examines internal controls over federal programs, tests compliance with specific grant requirements, and evaluates procurement, time-and-effort reporting, and cost allocation. Organizations required to have a single audit in one year generally cannot skip it the following year, even if expenditures dip below the threshold.
Changing or Releasing a Restriction
Circumstances change. A donor may have earmarked money for a building the nonprofit no longer plans to construct, or a scholarship fund’s original criteria may be so narrow that no one qualifies anymore. The law provides several paths for modifying or releasing these restrictions, but none of them lets the organization simply reassign the money on its own.
Getting the Donor’s Consent
The simplest route is going back to the donor. Under the Uniform Prudent Management of Institutional Funds Act, adopted in some form by the vast majority of states, an institution can release or modify a restriction with the donor’s written consent. The fund must continue to serve a charitable purpose of the institution, but the specific use can change if the donor agrees.
Court Modification
When the donor is deceased or cannot be located, the organization can petition a court. Two equitable doctrines apply. Equitable deviation lets a court modify restrictions on how a fund is managed or invested when the original terms have become impractical or wasteful. The cy-près doctrine goes further, allowing a court to redirect funds to a different charitable purpose when the original purpose has become unlawful, impossible, impractical, or wasteful. In either case, the state attorney general must receive notice and an opportunity to be heard.
UPMIFA also provides a streamlined process for smaller, older funds. If an institutional fund is valued below $25,000 and has existed for more than 20 years, the institution may release or modify its restrictions without going to court, though it must still notify the attorney general. Individual states may set different thresholds when enacting the law.
What Happens When Earmarked Money Is Misused
Penalties differ between the government and nonprofit contexts, but neither is forgiving.
Federal Grant Noncompliance
When a federal agency determines that a grant recipient has failed to comply with the terms of an award, the consequences escalate. The agency may temporarily withhold payments, disallow costs tied to the noncompliant activity, or suspend or terminate the award. In serious cases, the agency can initiate debarment proceedings, barring the organization from receiving any federal awards. It can also withhold future funding or pursue other legal remedies.9NIH. 8.5.2 Remedies for Noncompliance or Enforcement Actions A termination for material noncompliance is reported to the government-wide integrity database accessible through SAM.gov, where it remains visible for five years and factors into future award decisions.
Recipients and subrecipients are also required to promptly disclose credible evidence of federal criminal law violations connected to the award, including fraud, bribery, and conflicts of interest. Failure to make those disclosures can itself trigger enforcement action.10eCFR. 2 CFR Part 200 – Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards
Nonprofit Misuse of Donor-Restricted Funds
A nonprofit that diverts restricted donations to unauthorized purposes faces threats from multiple directions. Donors can sue the organization for breach of the gift agreement. State attorneys general, who oversee charitable organizations, can investigate and impose penalties ranging from fines to forced repayment. In egregious cases involving deliberate misappropriation, board members may face personal liability for fraud, and the organization risks losing its tax-exempt status with the IRS. The reputational damage alone can be existential for groups that depend on donor trust.
This is where smaller nonprofits often get into trouble. The board dips into a restricted fund during a cash crunch, planning to replenish it later. Even if the money is eventually restored, the temporary diversion still violates the restriction and creates audit findings that can snowball into enforcement action. The safer approach is treating restricted accounts the way you would treat someone else’s money held in trust, because legally, that is exactly what they are.