In-kind donations are non-cash contributions that come in the form of goods or services. It includes goods, services, time, or professional services. This guide will teach you about in kind contributions, issuing donation receipts, and assessing the impact of in-kind donations on nonprofits.
The lifeblood for some sustainable nonprofit organizations is securing cash donations, but gifts from donors come in many forms. If your nonprofit receives in-kind contributions, it is important to understand its value and how it impacts your nonprofit’s finances.
What is an in kind contribution?
In-kind contribution is a term that refers to nonprofit transactions that don’t involve types of cash donations. This type of contribution is recorded as monetary value, determined by the fair market price you’d otherwise pay for the goods or service you received. They typically come from companies, organizations, board members and individuals. Donor’s who provide goods, in kind services or time to an organization help provide direct assistance.
Gifts-in-kind or a gift in kind donation include:
- Donor donates food to a local food bank, and they distribute the items to people who need them.
- A volunteer at an animal shelter can use your time there.
- A social worker who helps people with mental health needs might use your expertise.
- Tangible items such as: computer hardware and software, office furniture, medical supplies, and food.
- Intangible items such as: securities, copyrights, and patents
- Board members providing pro bono professional in kind services
- Discounted or free use of office, meeting space, administrative services
In-kind contributions can be valuable if donated items are integral to your nonprofit organization’s mission, such as providing clothing for the homeless, or food for a food pantry. Professional in kind services normally paid for include legal or accounting work. They can help support the needs of your organization in a variety of ways and is a great way to reduce costs associated with your nonprofit.
What is not a qualifying in kind donation?
Some goods and services used by a nonprofit organization may not qualify as in-kind contributions. For example, a nonprofit may not accept the following:
- Items designated for another entity
- Gifts for a specific purpose
What are the benefits of in-donations for nonprofits?
- Helps nonprofit save on operating costs. It provide access to goods and services that the nonprofit may not be able to afford otherwise. Additionally, in-kind donations can help to build capacity within the organization by providing supporters with an easy way to give back.
- Can be used attract and retain employees. These donations can be less expensive than corporate giving or event sponsorship, and can be a great way to receive support from businesses, individuals, or venues.
- Helps nonprofit build relationships with donors. First, it allows the nonprofit to demonstrate to the donor how their donation will be used to further the nonprofit’s mission. Second, it builds trust between the donor and the nonprofit as the donor can see first-hand how their donation is being used. Third, it keeps the donor engaged with the nonprofit as they see their donation being put to use. Finally, it saves money for the nonprofit as they do not have to purchase these items themselves.
- Helps nonprofits expand their reach. They can also be used for fundraising: as prizes in raffles, auctions, swag bags and fundraising incentives. Organizations like thrift stores, community closets, food pantries and housing organizations rely on in-kind donations as a significant part of their operations.
- Helps nonprofits improve their impact. They are a good way for donors to give money when it’s difficult to give cash, and they know the immediate impact of their donation. Nonprofits can use in-kind donations without waiting for goods or services to be approved which is helpful when trying to better allocate limited funds.
Treat In-Kind Donations As Revenue
Generally Accepted Accounting Principles (GAAP) require nonprofits record all contributions as revenue upon receipt, including in-kind contributions. This includes goods or in kind services received that enhance non-financial assets, or require specialized skills provided by individuals possessing those skills.
Record these goods and in kind services in your financial records as both revenue and expenses.
What does in-kind revenue mean?
- Record Revenue using the fair market value of the gift.
- Fair market value is the price that you would pay for the goods or services, if you had to pay for the items.
- When recording the in-kind contribution, the offset to the revenue amount would be the corresponding value as an expense of in-kind good or services.
- Record Tangible property value as an asset, such as stocks, equipment, building or land.
When reviewing financial statements and planning for the future consider value and cost. Above all, if those contributions, or equivalent expenses are necessary to fulfill your mission. For example, if an accountant donated his services to prepare your annual IRS 990 and the value of that service is $1,000, you must budget that cost in the next fiscal year, in case you have to pay an accountant and not rely on an in-kind contribution.
This holds true for goods received that is part of your mission, such as food donated for your community kitchen. For example, your nonprofit receives $25,000 in donated food. You record this expense in your budget. This identifies the resources needed for the community kitchen program to be sustainable.
Challenges of Valuing and Tracking
These donations can be difficult to track and value because they are not always financial contributions. It can be in the form of tangible assets, such as furniture or equipment, or services that meet GAAP criteria, such as accounting or legal services. In order to track and value these contributions, nonprofits should include information about the donation, the donor, and the fair market value in their records.
They are valued at the “fair market value” which is the resale value of the donated item. Fair market value is based on the current resale value of donated items and can be difficult to determine. To value in-kind contributions, your organization should determine a fair value and track the number of hours the service is provided. If you’re already tracking the value, completing a Form 990 much easier.
In-Kind Contributions Procedures
It is important when receiving in-kind contributions that you acknowledge the donation by providing the proper documentation, or gift acceptance receipt to the donor.
- Create a policy related to donor acknowledgement.
- Create an in-kind contribution form to standardize the process of recording, reporting and acknowledging gifts.
- tax ID number of the organization
- detailed description of the gift
- date gift received
- statement that no substantial goods or services were received in exchange for the donation
- donor’s contact information
- estimated fair market value of the gift
- calculation of value
How do you write a thank you letter for an in-kind gift?
Write a thank you letter, or donor acknowledgement letter to the individual or organization who made the donation. It’s a good idea to mention what they donated, and how it will help your cause.
Donor Acknowledgement letter example
Include the following in gift acceptance letters:
- tax ID number
- amount and
- how the donation will be used
For example, “Your generous donation of $150 will assist the purchase of new soccer balls for children in need.”
What is an in-kind contributions form?
An in-kind contribution form is a document that the donor fills out to tell what they are donating and how much it costs. All types of donations, whether cash or items like clothing, furniture and cars, require the donor to fill out an in-kind contribution form.
The process of donating is straightforward: donors simply ask for a donation form at their local Salvation Army or other charitable organization and fill it out. The form should be filled in completely, accurately and truthfully before being handed over to the person who will process the donation.
In-Kind donations and the IRS
The IRS considers in-kind donations to be a contribution, and the value of the donation is generally considered as its market value. The IRS allows you to deduct the fair market value of property donated. Only donations to registered 501(c)(3) nonprofits are eligible for a deduction. Expenses incurred by providing service are also tax deductible.
Are in kind gifts tax deductible?
In kind donations made to charities are considered tax-exempt because they are given to nonprofits designated as charities. It is interesting to note, any gifts over $14,000 are consider taxable, but the nonprofit is not required to pay a tax. However, the giver of the donation is required to pay what is known as a gift tax.
How much of an in-kind contribution is tax deductible?
In-kind contributions are not tax deductible as a charitable contribution unless they meet certain requirements. A donor can deduct an in-kind donation as a charitable contribution. In order to do this, the donor must receive a written acknowledgement from the nonprofit to substantiate the gift. This acknowledgement does not assign a dollar amount to the donation. donors can deduct 50% of their contribution from their taxable income.
To illustrate, if you donate a computer that cost $X to make and is sold for $Y, you may claim $X in your deductions. Tax deduction is only if the fair market value of property is less than cost.
How to calculate the value of an in-kind gift.
This is calculated by subtracting what it would have cost to buy or produce the item new from its fair market price. If you donate clothing or household items which are not in good condition, the IRS may reduce their value to what you could sell them for.
If services are provided, you may want to check the stores you would have bought them at, and ask for their hourly rate or what they would have charged a paid client for the job they did for you.
How to solicit more gifts
The best way to promote charitable gifts is by reaching out to businesses and individuals in the community. A good way to do this is by creating a wish list of items that are needed and sharing this on social media, email, and newsletters. Another way to promote donations is by writing letters to local businesses, asking for a meeting to discuss partnering. When donors are contacted about donating items, it is important to follow up with a phone call and express gratitude. Donations can be promoted by mentioning the donor’s name and highlighting the impact of the donation. These contributions are crucial for nonprofits and should be shared with donors and audiences frequently.
Finally, you must evaluate the impact of receiving in-kind contributions. It is not worth it to accept in-kind goods from donors if the goods cannot be used to further your mission.
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