Key Takeaways
- Accumulated funds are surplus holdings of non-profit organizations, like profits of corporations.
- These funds increase when revenues exceed expenses, indicating a budgetary surplus.
- Accumulated funds support NPO causes, daily operations, or asset purchases during deficits.
- NPOs cannot use accumulated funds for private benefits or political activities.
- The term can also describe funds reserved for specific future purposes.
What Is an Accumulated Fund?
An accumulated fund is where a nonprofit organization (NPO) holds its budgetary surpluses, serving a role similar to retained earnings or profit in a corporation. It absorbs both surpluses and deficits over time and can only be used to support the organization’s mission. These funds also support liquidity and help build future assets for the nonprofit.
How Accumulated Funds Work in Nonprofits
A nonprofit organization is a business that has been granted tax-exempt status by the Internal Revenue Service (IRS) because it furthers a social cause and provides a public benefit. Donations made to a nonprofit organization are typically tax-deductible to individuals and businesses that make them, and the nonprofit itself pays no tax on the received donations or on any other money earned through fundraising activities.
Nonprofit organizations are sometimes called NPOs or 501(c)(3) organizations based on the section of the tax code that permits them to operate.
When an NPO earns money in excess of its expenses and charitable donations, it is placed into its accumulated funds. This money is set aside for the future purchase of assets, or to be used for the purpose of providing liquidity in times of budgetary deficits. An accumulated fund’s value is the organization’s net assets (i.e., assets to liabilities). Nonprofit organizations, such as civic clubs, societies, and charities, have capital accounts known as accumulated funds.
Money is directed into the accumulated fund when revenues are greater than expenses and there is a budgetary surplus. Money is directed away from the accumulated fund (withdrawn) when expenditures are greater than revenues and there is a budgetary deficit. The term accumulated fund can also be used as a generic term to describe any fund that accumulates money over time for a particular purpose, although it is most commonly used in conjunction with a nonprofit organization.
Important Considerations for Nonprofits Using Accumulated Funds
In order to be tax-exempt under Section 501(c)(3), an organization must not be serving any private interests, including the interests of the creator, the creator’s family, shareholders of the organization, other designated individuals, or other persons controlled by private interests. None of the net earnings in the accumulated fund of the organization can be used to benefit any private shareholder or individual; all earnings must be used solely for the advancement of its charitable cause or its day-to-day operations.
It is also forbidden from using its activities to influence legislation in a substantial way, including participating in any campaign activities the support or deny any particular political candidate. It is typically not permitted to engage in lobbying (except in instances when its expenditures are below a certain amount).
Practical Example of Accumulated Funds in Action
For example, if XYZ company makes monetary gifts each year that total $100,000 and XYZ only brings in $99,000 for the year, it can take $1,000 from its accumulated fund to gift its full $100,000 amount for the year. If the following year it generates $150,000 but only gifts $100,000, it would hold the remaining $50,000 in the accumulated fund.
The Bottom Line
An accumulated fund is the holding for a nonprofit’s budgetary surpluses and functions much like retained earnings in a for-profit organization. It can only be used to support operations and advance the nonprofit’s goals, not to benefit private interests or fund political activity. For example, an accumulated fund may be used to cover future program costs, facility repairs, or other long-term obligations.