What happens to un-usable designated gifts?

Many times donors want to give money to your organization for a specific purpose.  But what happens if the purpose for which they designated funds doesn’t materialize? For example, what if you raise funds for a building, and then the project is put on hold or cancelled?

One of the ways you can protect yourself is to request upfront that funds be available for purposes other than the original designation. Otherwise, you must go back to the donor when it is clear that designated funds can’t be used as originally intended. You can then ask for the ability to repurpose funds. If a donor wants their money returned, then you must comply. However, if you do give back a donation, you need to issue a Form 1099 for the year in which the donation was returned. The donor, who probably claimed a charitable donation, will treat the returned money as income and will pay applicable taxes.