Most non-profit organizations rely on gifts from other businesses and the public at large to achieve their goals. These come in the form of both tangible property and personal services (collectively nonfinancial gifts), which are referred to as in-kind contributions.
Recording these non-cash gifts allows a nonprofit organization to accurately present the types and value of contributions it receives to support its mission. Even though in-kind gifts are a major source of support for many nonprofits, recording and reporting them properly can present some unique challenges.
Types of In-Kind Donations
While cash is king with many charities, it’s not uncommon for nonprofits to encourage and receive other types of contributions. These “gifts in kind” can come in a variety of forms.
Examples of goods or property that might qualify as an in-kind donation are computer hardware and software, office furniture, medical supplies, and food. This category also includes intangible property such as securities, copyrights, and patents as well as items that can be used as fundraisers for prizes or put up for auction to raise money.
Examples of professional services, or expertise, that qualify as in-kind donations include:
> Legal services (most common)
> Accounting services
> Web design and social media help
> Consulting services
> Videography services
Creation of an Asset
If a volunteer or group of volunteers creates or enhances value in an asset it might qualify as an in-kind donation to a nonprofit, for example a group of volunteers working to build a home for low-income families.
Other services that certainly or might qualify as in-kind donations to a nonprofit include the discounted or free use of office or meeting space and free administrative services like copying or printing. Other examples are discounted or free catering and a special deal on utilities.
What Services and Donations Don’t Qualify?
Some goods and services used by a nonprofit, while donated, may not qualify as in-kind donations. Specifically, anything that is earmarked for use by another entity won’t be counted by your nonprofit.
Another instance that doesn’t qualify is if your organization receives products or services that it normally wouldn’t purchase. For example, a local musician donates their services to an event that you wouldn’t typically engage a musician to perform.
Gifts with strings attached are not considered in-kind contributions. If a donor wants to “give” something to your nonprofit and then dictate how it will be used, it’s not a true donation.
Finally, the value of volunteer hours is not considered a qualifying in-kind gift unless the volunteer is providing a “specialized skill”. For example, volunteers checking-in guests to an event, or even someone with specialized in a specific skill, but the volunteer effort is unrelated to the skill.
Accounting & Reporting of In-Kind Contributions
The rules applying to the accounting and reporting of in-kind donations can be complex. Considering most nonprofits substantially rely on these to prosper and achieve their missions, it’s a good idea to have a robust plan in place for their management.
Who you designate to handle this task will depend on your organizational structure and size. It might be your accounting/finance team or the development team. What’s most important is that you are properly recording in-kind donations and acknowledging each one appropriately.
How to Track and Record In-Kind Donations
How your organization must track and record in-kind donations depends on a few factors. If your nonprofit prepares its financial statements in accordance with Generally Accepted Accounting Principles (GAAP), then all in-kind gifts should be captured and reported in your financial records.
Organizations that are subject to an annual audit by an independent accountant must also meet this standard, and some may be required to do this by state law, or the terms and conditions set by a lender, grantor, or some other key constituent.
Even if you aren’t subject to GAAP and only file Form 990, keeping detailed financial records can be useful as an internal management, audit, and strategic planning tool.
When Gifts In-Kind Are Recognized
A nonprofit should record an in-kind donation as soon as a donor provides it to the organization and recorded in the period they are received or more frequently based on volume. At a minimum, they should be recorded annually.
How In-Kind Donations Are Valued
Donations in-kind are recorded on the books at fair value. FASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
How you determine the value of your in-kind donation will depend on the type of donation:
> For products, like computers, figure out what your organization would have paid for the goods on the open market had they not been donated.
> Track the hours of professional services donated to your organization.
> Contact the donor and ask them to place a value on the in-kind services.
The accepted way to record in-kind donations is to set up a separate revenue account but the expense side of the transaction should be recorded in its functional expense account. For example, revenue would be recorded as Gifts In-Kind – Services, and the expense would be recorded as Professional Services. Once you’ve determined the fair value of your donation, you’ll record the journal entry. The revenue will equal the expense. While it won’t have any net impact on your books, it will impact your organization’s total revenue and expenses, and it is a requirement of both FASB and the IRS.
Organizations can also record and report the amount of donated services they receive in a year that may not be recognized as revenue per GAAP, such as 5,000 hours or $75,000 in volunteer hours, but this must be done in either the notes to the financial statements or in an annual report.
Must You Acknowledge an In-Kind Donation?
When another organization donates to your nonprofit, saying “thank you” is the appropriate response. Beyond acknowledging the gift and expressing your gratitude, there are some other obligations you need to fulfill.
Follow IRS Guidelines
The IRS has written a comprehensive guide on gift substantiation. Some of the agency’s guidelines include:
Donors must have a bank record or written acknowledgment from the nonprofit before claiming a tax deduction for a charitable contribution.
Donors must have a written acknowledgment for any contribution of $250 or more.
What to Include in Your Acknowledgement
You should designate someone in your organization (CFO, CEO, or department head) to acknowledge all in-kind donations. While it doesn’t need to be done instantly, your letter or email should be timely and sent well before business tax returns are due. A good rule of thumb is to send these out upon the receipt of donations or within 30 days based on volume.
The IRS also provides guidelines relative to what should be included in your gift acknowledgment:
- A statement that you are a tax-exempt nonprofit as recognized under Section 501(c)(3);
- The date of the donation receipt;
- Either a description of the property or services donated (the donor is responsible for assigning value) or the amount donated if cash or something equivalent; and
- Either a declaration that the nonprofit did not exchange more than insubstantial services or goods in exchange for the donation or, if the donation was $75 or greater and there was an exchange of goods or services (such as a meal at a special event), a statement giving a fair estimate of the value of those goods or services.
Here is a simple example of an acknowledgment statement to an in-kind donation:
“Thank you for your contribution of [detailed description of goods/services] that [name nonprofit] received on ____ [date of receipt]. No goods or services were provided in exchange for your contribution. Your generous act will allow us to [Explain how they’re helping you.] We are committed to being worthy of your continued support.”
It’s a good idea to use a donor database or CRM to track your receipts and ensure that you are issuing acknowledgments timely and appropriately.
In-Kind Donations: Accounting and Reporting
In-kind donations are a valuable source of revenue for many nonprofits. These donations can take many forms, including goods, services, and time. Accounting and reporting for in-kind donations is important for a number of reasons. First, it helps nonprofits to accurately track their income and expenses. Second, it allows nonprofits to comply with IRS regulations. Third, it provides donors with the information they need to claim tax deductions.
There are a number of steps that nonprofits can take to ensure that they are accounting and reporting for in-kind donations correctly. First, nonprofits should develop a written policy on in-kind donations. This policy should define what types of donations are eligible, how they will be valued, and how they will be recorded. Second, nonprofits should create a system for tracking in-kind donations. This system should allow nonprofits to keep track of the value of their donations and to ensure that they are reporting them accurately. Third, nonprofits should document all in-kind donations. This documentation should include receipts, appraisals, and other information that supports the value of the donations. Fourth, nonprofits should provide donors with written acknowledgments for all in-kind donations of $250 or more. These acknowledgments should include the name of the donor, the date of the donation, a description of the donated property, and the fair market value of the donation.
By following these steps, nonprofits can help to ensure that they are accounting and reporting for in-kind donations correctly. This will help nonprofits to comply with IRS regulations, track their income and expenses accurately, and provide donors with the information they need to claim tax deductions.
The Consequences of Poor Accounting & Reporting for Nonprofits
You must properly record and report in-kind contributions because, in many cases, it’s required by law. Certain gifts are subject to GAAP, and some must be reported on Form 990 with your organization’s federal tax return. Failure to adhere to these standards could result in penalties that may include fines.
Further, there is the potential for deception in how gifts are reported on financial statements, so you want to make every effort not be one of “those guys.” Unscrupulous organizations have been caught inflating numbers to appear more successful than they are or hiding administrative costs to justify wasteful spending.
Finally, it makes sense to record your in-kind contributions for management purposes. Your organization needs to know what it would have to pay for those goods or services if it did not receive those contributions from donors. Lacking this, you may be in for a surprise if something like donated office space or legal services suddenly disappears.
Do you have questions about handling accounting and reporting for nonprofits?
About the Author
Todd Kimball is a Partner with CFO Selections and leads the non-profit practice in Oregon and SW Washington. He is also the Accounting Solutions Partners practice leader in Oregon and SW Washington.
Todd is a senior accounting professional with over 15 years of expertise in the non-profit and government sectors. He has a proven track record at tackling the most challenging not-for-profit accounting issues and finding solutions that work and move organizations forward. He excels at creating process efficiencies, motivating and utilizing staff to their full potential, implementing internal controls and providing sound technical expertise.