Pass-Through and Agency Contributions

Sometimes your nonprofit collects donations from donors and forwards the money to another organization -- the beneficiary. You are acting as a go-between, not as the end recipient. This is called a pass-through or agency arrangement, and it requires special accounting treatment.

GAAP requires you to record pass-through money as a liability, not revenue. The money isn't yours -- it belongs to the beneficiary until you send it. Recording it as revenue would overstate your income and misrepresent your financial position.

Here's the key distinction:

• Regular donation: A donor gives your organization $5,000 for your youth program. That's your money. It's revenue.
• Pass-through donation: A donor gives your organization $5,000 to forward to Habitat for Humanity. That's not your money. It's a liability until you send it.

Your Statement of Activities should only show revenue that belongs to your organization. Pass-through money should appear on your Statement of Financial Position as a liability that decreases when you forward the funds.

NP Ledger guides you through the pass-through workflow step by step:

1. Create a pass-through fund -- When you create a new fund, select the "Pass-through to another organization" option. Give it a name that identifies the beneficiary (e.g., "Project Tortuga" or "Habitat Partnership").

2. System auto-creates a liability account -- NP Ledger automatically creates a liability account in your Chart of Accounts called "Pass-Through Liability -- [Fund Name]." You don't need to set this up manually.

3. Record incoming donations -- When you receive a donation for the pass-through fund, select that fund in Quick Entry. NP Ledger routes the money to the liability account instead of revenue.

4. Forward the funds -- When you send money to the beneficiary organization, record a bill payment from the pass-through fund. This reduces the liability on your books.

5. Check your balance -- The fund balance shows how much you still owe the beneficiary. When it reaches zero, you've forwarded everything.

• Fiscal sponsorship -- Your established 501(c)(3) collects tax-deductible donations on behalf of a new project that doesn't have its own tax-exempt status yet.
• Collecting for a mission partner -- Your organization runs a joint campaign with another nonprofit and forwards their share of the proceeds.
• Disaster relief pass-through -- Your organization collects emergency donations and forwards them to an on-the-ground relief organization.
• International regranting -- Your US-based nonprofit collects donations and regrants them to an international partner organization.

Ask yourself these questions when a donation involves another organization:

• Are you forwarding 100% of the money? If yes, it's likely a pass-through (liability treatment).
• Do you have discretion over how funds are used? If yes, it may be revenue, not a pass-through. When your organization has the power to redirect funds to a different purpose, the transaction is a contribution to your organization, not an agency arrangement.
• Did the donor designate the money for a specific external beneficiary? If yes, and you're just the conduit, it's a pass-through.

When in doubt, consult your accountant. The distinction between agency transactions and contributions has real implications for your financial statements and tax filings.

Accountant Note: The distinction between agency (pass-through) transactions and contributions is governed by ASC 958-605. If the nonprofit has variance power -- the unilateral ability to redirect the funds to a different beneficiary -- the transaction is a contribution (revenue), not an agency arrangement. The key factor is whether the resource provider (donor) or the recipient organization (your nonprofit) controls how the funds are ultimately used. See ASC 958-605-25-24 through 25-27 for the specific criteria.

A community foundation collects $10,000 in donations earmarked for "Project Tortuga," a sea turtle conservation effort run by a partner organization.

1. Setup: Create a pass-through fund called "Project Tortuga." NP Ledger auto-creates "Pass-Through Liability -- Project Tortuga" in the Chart of Accounts.

2. Receive donations: Record $10,000 in donations to the Project Tortuga fund. The books show:

3. Bank account increases by $10,000 (asset)
4. Pass-Through Liability -- Project Tortuga increases by $10,000 (liability)

5. No revenue is recorded

6. Forward funds: Write a $10,000 check to the partner organization. Record it as a bill payment from the Project Tortuga fund. The books show:

7. Bank account decreases by $10,000
8. Pass-Through Liability -- Project Tortuga decreases by $10,000

9. The liability is now zero -- all funds have been forwarded

10. On your reports:

11. Statement of Financial Position: no pass-through liability remaining
12. Statement of Activities: no revenue or expense from this arrangement (the money was never yours)