An in-kind donation does not involve cash gifts and can be one of the most important resources for many nonprofits. This article provides an in-depth guide for in kind donations compliance.
The lifeblood for some sustainable nonprofits 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 donation?
In-kind donation is a term that refers to transactions that don’t involve cash gifts. It includes goods, services, time, and expertise. These types of donations are often made by companies, organizations, and individuals. When donors donate goods, services or time to an organization, their donation could be used to provide direct assistance.
In-kind donations are considered gifts-in-kind or a gift in kind donation. For example:
- 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
- Discounted or free use of office, meeting space, administrative services
In-kind gifts can be valuable if donated items are integral to your organization’s mission, such as providing clothing for the homeless, or food for a food pantry. In-kind services are also important if the services provided would normally have to be paid for, such as legal or accounting work.
What is not a qualifying donation?
Some goods and services used by a nonprofit may not qualify as in-kind donations. For example, a nonprofit may not accept the following as in-kind donations:
- Any item that is earmarked for use by another entity won’t be counted as donation
- If a donor wants to dictate how something is used, it’s not a true donation.
Treat In-Kind Donations As Revenue
Under Generally Accepted Accounting Principles (GAAP), all contributions received should be recorded as revenue upon receipt, including in-kind contributions. Contributed goods or services received should be recorded if those services create or enhance non-financial assets, or require specialized skills and are provided by individuals possessing those skills.
It is important that these goods and services are recorded in your financial records as both revenue and expenses.
What does in-kind revenue mean?
- The revenue is recorded 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.
- If the goods received is tangible property that is held by your organization, then the value must be recorded as an asset, such as stocks, equipment, building or land.
When reviewing financial statements and planning for the future, the value and cost of in-kind contributions must be considered, 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.
The same is true for goods received that is part of your mission, such as food donated for your community kitchen. If you received $25,000 in donated food, that expense must be included in your budget, to identify the resources needed for the community kitchen program to be sustainable.
In-Kind Donation Procedures
It is important when receiving in-kind contributions that you acknowledge the gift by providing the proper documentation, or receipt to the donor.
- Your organization should create a policy related to the acceptance of in-kind contributions.
- You can create an in-kind contribution form to standardize the process of recording, reporting and acknowledging gifts.
- The form should include a detailed description of the gift, the date the gift was received, the donor’s contact information and the estimated fair market value of the gift and how the value was determined.
How do you write a thank you letter for an in-kind donation?
The thank you letter should be written to the individual or organization that is making the donation. It’s a good idea to mention what they donated, and how it will help your cause.
In Kind donation letter example
For example, include your tax ID number, amount and how the donation will be used:
The donation of $150 will be put towards 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, accurate and truthful 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.
How much of an in-kind donation is tax deductible?
In-kind donations 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.
Are in kind donations 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 to calculate the value of an in-kind donation.
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.
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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