Earmarked funds are money that is legally restricted to a specific purpose, so the recipient cannot spend it on anything else. The restriction can come from Congress, when an appropriations bill directs money to a named project, or from a donor, when a gift to a nonprofit carries instructions about how it must be used. In both cases the obligation is enforceable, backed by audits, and violating it carries real consequences.
What “Restricted” Actually Means
Unrestricted money moves with the organization’s priorities. A city council can shift unrestricted budget dollars from parks to road repair. A nonprofit board can pull unrestricted donations to cover rent. Earmarked money does not work that way. It stays locked to its designated use no matter what else the organization would rather do with it.
For nonprofits, the Financial Accounting Standards Board sets the framework. Under ASU 2016-14, every net asset falls into one of two categories: “with donor restrictions” or “without donor restrictions.”1FASB. Accounting Standards Update No. 2016-14 Restrictions themselves come in two flavors. Some are temporary and expire when a condition is met or a deadline passes, such as a grant tied to a specific summer program. Others are permanent, most often an endowment, where the donor requires the principal to stay intact and only investment income can be spent.2FASB. Not-for-Profit Entities (Topic 958) – Clarifying the Scope and Accounting Guidance
Earmarks in Government Appropriations
In the public sector, an earmark is a provision inserted into an appropriations bill that directs federal money to a specific project, entity, or location. Congress paused the practice from 2011 through early 2021, then reintroduced it under new names and stricter transparency rules. The House calls its version “Community Project Funding,” and the Senate uses “Congressionally Directed Spending.”3Congress.gov. Community Project Funding: House Rules and Committee Protocols
What Binds an Agency to Spend the Money
Not every mention of a project in the legislative process has legal force. An earmark written into the enacted statute binds the executive branch. An earmark that appears only in the committee report accompanying a bill does not. Executive Order 13457 directed federal agencies not to commit or spend funds based on earmarks that live only in non-statutory language like committee reports.4Congress.gov. Earmark Disclosure Rules in the House Agencies often treat report language as strong guidance in practice, but they are not legally required to follow it.
Disclosure and Certification Rules
The reinstated process comes with disclosure obligations. In the House, any member requesting an earmark must submit a written statement to the committee identifying the member, the intended recipient’s name and address, and the purpose of the funding, along with a certification that neither the member nor their spouse has a financial interest in the project. The Appropriations Committee extended that certification to cover immediate family members.5U.S. House of Representatives Committee on Ethics. Certification of No Financial Interest in Fiscal Legislation
Every request must be posted on a searchable public website at the same time it goes to the committee. For-profit entities cannot receive Community Project Funding. Each member is limited to ten requests, the total pool is capped at one percent of discretionary spending, and the Government Accountability Office audits a sample of funded projects.3Congress.gov. Community Project Funding: House Rules and Committee Protocols
The Senate has a parallel structure. Under Senate Rule XLIV, no vote can proceed on a measure or conference report unless a complete, searchable list of all earmarks and the requesting senators’ names has been posted on a public congressional website at least 48 hours ahead of the vote. Floor amendments that add an earmark must have those details printed in the Congressional Record as soon as practicable.6Congressional Research Service. Earmark Disclosure Rules in the Senate: Member and Committee Requirements
Donor-Restricted Gifts to Nonprofits
When a donor attaches instructions to a gift, the nonprofit takes on a fiduciary obligation to honor them. The restriction might arrive in a formal grant agreement, a letter accompanying the check, or language printed on a donation form. What matters is that the donor’s intent is documented. 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.
FASB’s guidance tells nonprofits to evaluate each contribution for a donor-imposed restriction by looking at 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 Once classified as restricted, the money stays restricted until the conditions are satisfied or the restriction is formally released.
Tracking those dollars takes more than intent. Most nonprofits use fund accounting, treating each restricted fund as its own fiscal entity with a distinct trail of receipts and expenditures. Financial statements typically show restricted and unrestricted funds side by side on both the income statement and the balance sheet.
When Federal Grants Are the Source
Restricted money from a federal grant carries an additional layer of rules under 2 CFR Part 200, known as the Uniform Guidance. Recipients must maintain internal controls that provide reasonable assurance the award is being managed in compliance with all applicable requirements.7eCFR. 2 CFR 200.303 – Internal Controls Federal procurement standards apply to purchases made with grant dollars, and pass-through entities that hand federal funds to subrecipients take on responsibility for monitoring those downstream recipients.
A non-federal entity that spends $1,000,000 or more in federal awards during its fiscal year must undergo a single audit, a threshold that rose 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 tests internal controls over federal programs, checks compliance with specific grant requirements, and evaluates procurement, time-and-effort reporting, and cost allocation.
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’s criteria may have grown so narrow that no one qualifies. The law offers several paths for adjusting a restriction, and none of them let the organization simply reassign the money on its own.
The most direct path is the donor’s written consent. Under the Uniform Prudent Management of Institutional Funds Act, adopted in some form by most states, an institution can release or modify a restriction if the donor agrees in writing and the fund continues to serve a charitable purpose.
When the donor is deceased or cannot be located, the organization can petition a court. Equitable deviation allows a court to change how a fund is managed or invested if the original terms have become impractical or wasteful. The cy-près doctrine goes further, letting a court redirect funds to a different charitable purpose when the original purpose has become unlawful, impossible, impractical, or wasteful. The state attorney general must receive notice and a chance to be heard before the court acts.
UPMIFA also creates a shortcut for small, old funds. If an institutional fund is worth less than $25,000 and has existed for more than 20 years, the institution can release or modify the restriction without a court order, though it still has to notify the attorney general. Individual states can set different dollar thresholds or time periods.
What Happens If Earmarked Funds Are Misused
The penalties for redirecting restricted money without authorization differ between government grants and private donations, but neither side is forgiving.
Federal Grant Noncompliance
When a federal agency finds that a grant recipient has failed to comply with the terms of an award, the response escalates. The agency can temporarily withhold payments, disallow costs tied to the noncompliant activity, or suspend or terminate the award. In serious cases, it can start debarment proceedings that block the organization from receiving future federal awards, withhold funding for the project, 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 stays visible for five years and factors into future award decisions.
Recipients and subrecipients also have to promptly disclose credible evidence of federal criminal law violations connected to the award, including fraud, bribery, and conflicts of interest. Failure to disclose can itself trigger enforcement action.10eCFR. 2 CFR Part 200 – Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards
Nonprofit Misuse of Restricted Donations
A nonprofit that diverts restricted gifts to unauthorized uses can be hit from several directions. Donors can sue for breach of the gift agreement. State attorneys general, who supervise charitable organizations, can investigate and impose penalties ranging from fines to forced repayment. When misappropriation is deliberate, board members may face personal liability for fraud, and the IRS can revoke the organization’s tax-exempt status.
Smaller nonprofits often get into trouble here without realizing it. The board dips into a restricted fund during a cash crunch, intending to put the money back later. Even if the fund is eventually restored, the temporary diversion still violates the restriction and creates audit findings that can grow into enforcement action. The safer stance is to treat a restricted account the way you would treat someone else’s money held in trust, because legally, that is what it is.