Donor-advised funds have become one of the most popular philanthropic vehicles in the United States, and for good reason. DAF grantmaking totaled $64.89 billion in fiscal year 2024, a figure that reflects how dramatically these giving accounts have grown in recent years. For nonprofits, DAF gifts can represent significant revenue, and the number of donors using them continues to rise.
Which makes it all the more important that nonprofits understand what DAF money can and cannot be used for. Because a meaningful and growing share of DAF gifts arrive at nonprofit organizations in ways that do not comply with IRS rules. And while the donor bears primary legal responsibility for improper DAF use, the nonprofit that accepts the gift is not without exposure.
This is not a niche compliance issue for large development shops. It is a practical concern for any nonprofit that hosts fundraising events, accepts sponsorships, or is navigating a donor base that increasingly gives through DAFs.
What a Donor-Advised Fund Actually Is
A donor-advised fund is a giving account held at a sponsoring organization, typically a community foundation or a financial institution's charitable arm. Donors who contribute to a DAF receive an immediate tax deduction and can then recommend grants to qualifying nonprofits over time, while the contributed assets grow tax-free in the interim.
The tax advantage is real and substantial, which is why DAFs have grown so quickly. But that advantage comes with a legal condition that is fundamental to how DAFs work: DAF funds must be used exclusively for charitable purposes, and DAFs are prohibited from conferring "more than incidental" benefits to the DAF owner.
That prohibition is not a technicality. It is the core principle that governs what DAF money can do. A donor who contributes to a DAF has already received a tax deduction on those funds. The IRS position is that the same funds cannot then flow back to that donor in the form of personal benefit: tickets to a gala, items from a charity auction, event sponsorship packages that include attendance, merchandise, or other tangible perks. The IRS is enforcing the longstanding tax principle that a taxpayer cannot deduct value given to a charity that is effectively transferred back to the taxpayer.
The Event Ticket Problem
The most common area where DAF misuse surfaces in the nonprofit sector involves fundraising events. It is also the area where many organizations (and many donors) are operating in good faith without realizing they are on the wrong side of the rule.
The IRS has strict rules when it comes to donor-advised funds and event tickets for charitable fundraisers. Specifically, they prohibit DAFs from covering any part of an event ticket, even if a segment of the ticket price is deemed tax-deductible. This surprises many people, because nonprofit event tickets are commonly structured as partially deductible. The donor pays $250 for a ticket, $100 of which represents the fair market value of the dinner and entertainment, and $150 of which is the charitable contribution. Surely a DAF could cover the $150 portion?
The IRS has taken the position that Internal Revenue Code Section 4967 prohibits donor-advised grants from conferring "more than incidental" benefits to DAF holders, and in its 2017 Notice expressed the opinion that DAF grants that enable attendance or participation in a charity-sponsored event do indeed provide more than incidental benefit. The entire ticket cost, both the deductible and non-deductible portions, must come from funds outside the DAF.
The same principle applies to event sponsorships that include attendance benefits. DAF donors cannot receive more than incidental benefits such as event tickets or auction items in exchange for their charitable grants. Items such as gala table sponsorships, event tickets, 5K race registrations, and items at a charitable auction are prohibited.
What counts as incidental? There is a token gift exception tied to inflation. In 2025, a benefit is disregarded if it is worth not more than 2% of the donor's payment or $136, whichever is less. Recognition in an event program, a small branded item of negligible value, or a name on a signage board may qualify. A table at a gala does not.
Why Nonprofits Need to Care
It is tempting to view DAF compliance as entirely the donor's problem. The DAF sponsor, the community foundation or financial institution holding the account, approves distributions, and the donor is the one who recommended the grant. If a donor uses their DAF improperly, shouldn't the liability rest with them?
Mostly, yes. But not entirely.
Nonprofits can face IRS penalties, excise taxes, and the revocation of their tax-exempt status if they accept DAF payments in exchange for sponsorships that provide "more than incidental" benefits to the donor. An organization that knowingly accepts DAF funds in exchange for event benefits, or that structures its acknowledgment in a way that obscures what the donor received, is taking on real legal and reputational risk.
There is also a practical reality: DAF compliance issues tend to cluster around the same donors, often board members or long-standing major donors who have grown accustomed to using their DAFs for everything. These are relationships the organization values. Addressing the issue after the fact is considerably more uncomfortable than having a clear policy in place before the event is promoted.
The good news is that the fix is not complicated.
What a Good Policy Looks Like
Organizations that have navigated this well tend to have done a few things consistently.
Draft explicit written policy. The policy should state clearly that DAF funds cannot be used to purchase event tickets, sponsorship packages that include attendance benefits, auction items, or other benefits of tangible value. It should specify what donors can do instead, make a separate unrestricted DAF gift above and beyond the event cost, with no benefits attached, in addition to paying for event attendance through other means.
Include language in event materials and acknowledgments. Donor acknowledgment letters and event registration materials are the right places to communicate DAF restrictions clearly and in advance. Several organizations have developed standard language noting that DAF instructions do not permit the issuance of tickets or attendance benefits when DAF funds are the source of payment, and that donors who wish to attend may pay for tickets separately by check or credit card. This approach, communicated consistently, tends to receive minimal pushback after the first year of enforcement.
Use the auditors. Organizations that have engaged their external auditors on this question have generally found them to be clear and direct: the era of treating this as a grey area is closing. Having the auditors on record, and being willing to reference that guidance in conversations with resistant donors or board members, gives staff and leadership a credible, non-personal basis for enforcing the policy.
Apply the policy consistently, including to board members. Board members are frequently among the donors most likely to use DAFs for event sponsorships or table purchases. Applying a different standard to board members than to other donors is both legally indefensible and organizationally corrosive. The policy means everyone.
Document pushback when it occurs. Staff members who raise DAF compliance concerns with leadership should keep a written record of when concerns were raised and how they were received. This is not about creating organizational conflict. It is basic professional protection in an environment where compliance responsibility can be ambiguous.
Workable Alternatives for DAF Donors
Donors who want to support a fundraising event and give through their DAF are not without options, they simply require a different structure.
A donor can make an unrestricted DAF grant to the organization that is not connected to any event benefit. Separately, the donor can purchase event tickets or a sponsorship using personal funds: a check, a credit card, any non-DAF source. Recognition in event materials, provided it is purely honorary and carries no financial value, is generally considered incidental and does not trigger the prohibition.
Donors can also consider general event sponsorships as long as they forgo any associated benefits, and can collaborate with the nonprofit to structure their sponsorships in a way that excludes benefits, ensuring that their contributions primarily support the organization's mission.
Communicating these alternatives clearly, in the same communication that explains what DAF funds cannot do, tends to preserve the donor relationship while bringing the gift into compliance.
The Bigger Picture
DAFs are not going away. Grantmaking through donor-advised funds has grown rapidly and shows no sign of slowing. For nonprofits that host events, cultivate major donors, or work with corporate sponsors, understanding the rules is no longer optional background knowledge. It is operational necessity.
The organizations best positioned to navigate this are the ones that have addressed it proactively, with clear written policy, consistent communication, and leadership willing to enforce the standard even when it is uncomfortable. The ones least positioned are those still treating DAF compliance as someone else's problem.
It is not. And the IRS's posture on this question is only becoming clearer.
Nonprofit Snapshot publishes perspectives from across the nonprofit sector. Views expressed are for informational purposes only and do not constitute legal or tax advice. Organizations should consult qualified legal and accounting professionals regarding their specific circumstances.