If you are a nonprofit some donor will eventually give you an in-kind donation instead of typical cash. In-kind donations can be tangible and intangible assets. You could be receiving tangible donated items like shirts, posters, supplies or any other items. Intangible donated items can be patents, copyrights or even professional services like legal or accounting. In-kind gifts are recorded when a donor provides the item unconditionally and without receiving anything in return. The donor should not hold a partial interest in the items donated to your organization. The IRS rules states that the value of time and services cannot be deducted by the donor.
The first issues most nonprofits encounter is how to value the in-kind gift for donors. Nonprofits should not be actually valuing any gifts for donors. How are you going to acknowledge the donation if you have no idea what it costs? You are supposed to use the fair market value of such gifts. Use the donor’s website or local shop prices to get an idea of how much items should cost. By acknowledging the amount, it would cost you is not the same as valuing the gift. Any donated asset that does not have a value and no alternative uses should not be recognized in the nonprofit financial statements. If the products being given to your nonprofit is expired or worthless. You don’t have to recognize some items given to your organization in financial statements, but you can still provide them with an acknowledgment letter. The donor is still contributing to your nonprofit, and you still want to say thank you to organizations or individuals helping. This is a good way to make donors feel appreciated, while fostering a continued relationship.
A donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor obtains a written acknowledgment of the contribution from the recipient organization. An organization that does not acknowledge a contribution will not incur any penalties, and aren’t really required to provide any. Without a written acknowledgment the donors cannot claim the tax deduction. Most businesses will not donate to an organization without receiving an acknowledgment. A written statement should contain certain elements. This can work for cash or non-cash contributions alike.
- the name of organization and tax Id number.
- the amount of cash contribution if any
- a detailed description without the value of the non-cash contribution
- a statement that no goods or services were provided by the organization in return for the contribution, if that was the case
- a description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution.
- a statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible benefits.
You should you write your acknowledgement letter so it’s clear what you received from the donor. We are going to use an example of If your nonprofit organization POIU was given catering as an in-kind donation by a catering company? The catering company charged $3,500 a discounted price to do the event. Even though the catering company would normally charge customers $8,000 including staff time. How would you recognize this in-kind donation? I wrote a quick statement that you can use.
“Thank you for your generous gift of a buffet style catering for our fundraiser event in which we had 100 potential donors attend on 09-12-15. Your generous contribution will help the POIU foundation further our important work. You would be glad to know that we were able to raise $16,260 through pledges and donations that night.
Under current IRS regulations, you will not be able to declare the value of your donation from our acknowledgment. We can say that your generosity is greatly appreciated. If we had to purchase this buffet style catering on our own it would have cost us approximately $8,000. We saved $4,500 for what you gave as an In-Kind contribution. The money saved is able to go directly to support our homeless clothing initiative.”
Donated services are normally recognized in the financial statements if those services are able to create or enhance a nonfinancial asset. Alternatively, if those donated services require specialized skills that are provided by an entity who possess the skills, and your entity would need to purchased them if they were not recognized. A good example would be if an accountant at IATC provides accounting services for your non-profit at no charge. The nonprofit organization would need to recognize the value of the accounting services as a contribution and related expense, because those services would need to be purchased if not otherwise provided.
Donated services that create or enhance a nonfinancial asset do not need to be specialized to be recognized, but those that neither create nor enhance a nonfinancial asset must be specialized to be recognized. In other words, you should not recognize the value of these services provided as they are not specialized skills and would not need to be purchased in the normal course of business. In-kind contributions of property but not of services should be reported on
Line 1 of Parts II and III of Schedule A;
Form 990, Part VIII line 1g;
Schedule B, Part II;
or Schedule M, column (c) if applicable
Form 990 filers generally may use any reasonable method to determine or estimate the value of these non-cash contributions. Schedule B gives you special instructions for valuing marketable securities. Schedule M requires that you report of the method used to determine the revenue attributable to the different categories of non-cash contributions. In-kind donations of services are not reported on Form 990, but the value of those services will be shown as reconciling items on the 990.
Financial Statement Disclosure
Disclosure are there to give additional insight into events. The contributed services received should disclose the events or activities for which the donated services were used. This area should give more details into about nature and extent of the contributed services, and the amount recognized as revenue during the period. This is the best place to disclose the amount of donated services received, but not recognized as revenue.
Tax Deductible Value
The value of In-Kind gifts for which the nonprofit should thank the donors for contributing is not the same as the value that the IRS allows to be deducted for tax purposes. Donors will feel they have given a lot more than what they can deduct as an in-kind donation. IRS already states donors of In-Kind gifts cannot take a deduction for the time that they donated as a part of an In-Kind gift. Donors are able to deduct only their actual out-of-pocket expenses. The donor itself is responsible for having the receipts before taking such a tax-deduction for their charitable gifts. Let us take our catering example If you are given catering as an in-kind donation by a catering company. The catering company spent $1,500 on the food and supplies to make the event possible. Even though the catering company would normally charge customers $ 8,000 including staff time. They can only deduct the $1,500. If someone decided to hire the catering company for your organizations and paid the full $8,000 then they can deduct the $8,000 as an in-kind donation.
Recording and Valuing In-Kind Donations?
In-kind should be recorded at fair market value as contribution revenue as an asset or expense in the period received. Guaranteed Pledges to give noncash items are required to be recorded as contribution revenue in the period the promise is made even though the organization may not actually receive the asset or benefit until a future period. The pledged asset would be recorded when the contribution is made and expensed in the period of the benefit. The fair market value of in-kind tangible assets can be determined by using the price you would pay on an open market for the same or similar items. You can visit a local store or use the internet to make this task easier. Services received can be determined by the normal hourly rate charged for the provided service.
I decided as an accountant to donate thirteen hours of my consulting services, and my normal hourly rate is $200 per hour. Your organization would record $2,600 of contribution revenue and professional fees expense as a result.
Donors sometimes will provide discounted goods or services to your nonprofit organization. In these situations, your organization should record the difference between the market rate and the discounted rate paid as contribution revenue and expense like in the catering example above.