Unrestricted net assets are financial resources of a nonprofit organization that have no restrictions attached to their use. A nonprofit organization classifies its net assets as one of the following three categories:
- Unrestricted Net Assets
- Temporarily Restricted Net Assets
- Permanently Restricted Net Assets
Unrestricted net assets generally include fundraising grant revenue, income from the sale of merchandise or services, and cash or property donations with no donor imposed restrictions on their use.
Example of Unrestricted Net Assets
Charity ABC Inc., a Section 501(c)(3) organization based in Miami, Florida, provides food and clothing to the homeless community. In 2023, John Doe contributed $5,000 to the charity’s general operating fund. The charity can use the funds for whatever purpose it deems fit to further its charitable activities.
Example of Permanently Restricted Net Assets
Charity ABC Inc., a Section 501(c)(3) organization based in Miami, Florida, provides food and clothing to the homeless community. On January 1, 2023, Jane Smith donated $1,000,000 to the charity with the condition that the funds be permanently restricted and only the investment income earned on the assets could be used for operations.
The charity deposits the funds into its investment account and purchases Treasury Bonds. The interest income earned on the $1,000,000 of treasury bonds was $20,000 for the 2023 fiscal year. The charity can use the $20,000 of investment income for operations, but it cannot spend the $1,000,000 principal amount.
Federal Income Tax Reporting
Nonprofit organizations must file either a Form 990 (Return of Organization Exempt from Tax) or a Form 990-PF (Return of Private Foundation). The equity section of the nonprofit organization’s balance sheet contains separate line items for “net assets without donor restrictions” and “net assets with donor restrictions”.