How Nonprofits Benefit from and Account for In-Kind Donations

As a nonprofit organization, you’re likely no stranger to creative fundraising, public and private funding, and grants. It’s all too easy, however, to narrow your focus to the cash side of the donation spectrum when seeking to raise funds for your nonprofit organization. Sure - cash is necessary to run any business, and it has its purpose. It has a “no-nonsense” fair value, making accounting for it generally non-complex. But it’s not the only charitable option for every tax-exempt organization out there. In fact, your organization’s mission, strategy, goals, and financial needs may benefit significantly from broadening your fundraising efforts to focus more on in-kind donations.

So, how do in-kind donations differ from cash donations for nonprofits? In-kind donations are the non-cash gifts, and not just tangible property. These contributions can include services, expertise, and intellectual property. Your organization can receive needed resources through in-kind donations, and, in turn, you can use your cash to grow your operations and ramp up your community impact in new, exciting ways. And refocusing your efforts to non-cash donations can work favorably with your efforts to build lasting community and donor relationships! 

There are qualifications that determine a nonprofit’s eligibility to receive in-kind contributions, and the accounting and reporting requirements can be trickier to navigate. But don’t let that intimidate you. With a trusted advisor by your side, you can make a plan for a shift in your organization’s charitable focus, get assistance in checking and maintaining your eligibility, and remain in compliance with accounting and reporting requirements.

Is my nonprofit eligible?
Generally speaking, your organization needs to be a 501(3)(c) charitable organization, without private interests. The IRS has a full list of qualifications here, but, for most nonprofit organizations, the focus on eligibility confirmation lies here: You’re eligible if your nonprofit is “a community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals.”

The IRS also provides access to Publication 78 Data, which is a downloadable file containing a list of most eligible organizations. This tool’s benefits are two-fold for charitable organizations. Your nonprofit organization can check your status, and potential donors can check that they are contributing to a qualifying organization, which increases their comfort level in donating by ensuring their own tax benefits to be received post-donation. Today’s donors are savvy, so advertising your eligibility can only help your efforts.

What qualifies as an in-kind donation?
While this list is by no means all-inclusive, let’s take a look at some examples of in-kind contributions. The biggest qualifier here is simple: It has to be a good or service your organization would have purchased anyway. Just being free or discounted isn’t enough to make something a qualified in-kind donation.

Property and operating facilities provided to your organization, as well as utilities, office furniture and supplies, and items that may be auctioned through your organization’s charitable events are in-kind donations. These donations also include intangibles, like copyrights, patents, and royalties. And items used in program activities definitely count! If your organization provides medical assistance, the medical supplies you receive are in-kind donations.  If your organization builds homes for those in need, the building supplies, appliances, and fixtures are in-kind donations.

Services also play a significant role. Many charitable organizations are built on volunteer services. Specialized volunteering is an in-kind donation. Nurses volunteering for your medical organization, for example, or project managers and builders on construction projects. Expertise can be an in-kind donation as well. This includes professional services gifted to your organization, such as accounting, legal, and consulting services.

Accounting & Tax Considerations
Your organization’s eligibility to receive in-kind donations is tied closely to your compliance with Generally Accepted Accounting Principles (GAAP) and with federal tax reporting requirements. Failure to comply with these regulations may lead to a revoked tax-exempt status. So, ultimately, your organization’s growth and success require accurate internal records, financial statements, and required tax filings. Let’s take a look at a few (of the many!) accounting and tax considerations for in-kind donations.

In accordance with GAAP, your financial statements should reflect the in-kind donation in the period in which it was received and at fair market value as both contribution revenue and as a corresponding asset or expense. If the donation is tangible property, for example, it gets recorded at the price you would have paid for the item if it HAD NOT been donated and it HAD been purchased at retail. It’s important to note that the detail in recording the item also depends on the type of item received, as well as on the quantity and quality of the item(s) received. So, if the donation was in bulk quantity, for example, a bulk rate should be used in calculating the fair value, not the fair market retail rate charged per single item. As for quality, you may receive a donation that is acceptable for your organization’s purposes, but that’s in a condition considered less than ideal in the retail world. An adjustment to the rate you record is needed here as well.

If the in-kind donation is a service, fair value should be calculated using the service provider’s usual hourly rate of service. And it should be reflected on your books as both a contribution revenue AND as an expense. Why? It is a professional service you would have sought if it had not been donated to your organization, so it’s an expense. Keep in mind that general advice and services provided by board members do not qualify as in-kind services. And service disclosures should be detailed, including what activities and programs the services aided. Volunteer services provided by non-professionals (unlike the nurses and builders mentioned above) are generally disclosed at an estimated value and are not recorded as revenue.

In-kind donations aren’t only all or nothing deals, either. Goods and services that are not 100% free, but are provided at a discounted rate, can still be in-kind donations. Recording them in the books just requires a tweak. You’re still recording the donation as both contribution revenue and as an expense, but the amount recorded will be the difference between fair market value and the discounted rate you received. Another consideration of note here is whether the service provider always provides a discount to nonprofit organizations. If you received a “standard nonprofit discount” from your service provider, it’s not considered an in-kind donation.

As for tax reporting, most tangible donations, with the exception of higher value gifts that require additional forms, are reported on the organization’s annual Form 990. In-kind services are treated differently for tax purposes, and, aside from a sum value entry as a reconciling item on your annual information return, do not have to be reported on Form 990.

Getting Started
The intricacies of accounting and reporting for charitable contributions can be technical and vast. However, they should never impede the growth of your organization or the success of your mission. The professionals at Livingston & Haynes are nonprofit industry leaders here to help organizations like yours through every stage of your organization’s growth, including assistance with planning, accounting, and reporting for in-kind donations. Contact us to discuss a strategy specific to your organization’s needs.

by Wendi S. Haynes, CPA