In-Kind Donations: Nonprofit Accounting Guide
As someone involved in a nonprofit, you're likely familiar with the concept of in-kind donations - those non-cash gifts that can add so much value to your organization. But are you confident in how you're accounting for these donations? There's a little more to it than just writing a thank you note.
Let's get into the nitty-gritty of in-kind donations and nonprofit accounting so your organization can continue to benefit from these donations and remain compliant.
What are in-kind donations?
Often misunderstood, in-kind donations are non-monetary contributions, whether goods or services, that individuals, companies, or even other nonprofits offer to your organization. Donor recognition is important in this process as it not only acknowledges the donor's contribution but also strengthens your relationship with them.
The value of in-kind donations can greatly impact your fundraising strategies. For instance, if a digital marketer donates their services, you can reallocate the budget initially set for that purpose to other areas, maximizing your resource utilization. This is where impact assessment becomes crucial. By evaluating the worth of in-kind donations, you can discern how they affect your budget and plan accordingly.
Moreover, in-kind donations have specific reporting requirements. You need to accurately record their fair market value in your financial statements. This practice ensures transparency and maintains trust with your donors and stakeholders.
The Two Types of In-Kind Donations
In-kind donations generally fall into two categories: goods and services.
When you think of goods, consider tangible items like equipment or food.
Services, on the other hand, encompass donated professional time or expertise.
Goods
When you think about in-kind donations of goods, you're considering the physical assets or materials that nonprofits leverage to improve their operations or services. These assets, ranging from office equipment to sports gear, are crucial for donor recognition and operational efficiency.
Some examples of in-kind donations are:
Supplies and materials donated to the nonprofit for distribution to the groups they are supporting.
Office supplies and equipment such as computers, staplers, paper, etc.
Fundraiser materials or equipment such as tables, booths, etc.
In-kind donations can also be stocks and real estate, even if they aren't physical goods due to the nature of those donations being considered assets.
Donation tracking is essential, ensuring each contribution is accounted for and its impact assessed. Valuation methods are used to determine the worth of these goods, which is necessary for accurate reporting requirements. They also help to quantify the positive effects such donations bring to the organization.
Services
Besides tangible goods, you might also receive in-kind donations in the form of services, a valuable resource that can greatly enhance your nonprofit's operational efficiency and financial sustainability. Service donations can greatly reduce your overhead expenses. For instance, a lawyer might provide pro bono legal expertise or a digital marketer may offer free services. These expertise service donations allow you to allocate the money that would have been spent on those service towards other areas of your organization.
Even time contributions, such as web development or graphic design, can offset marketing costs. Occasionally, a generous donor might cover a service bill on your behalf, another form of in-kind donation.
Accounting for In-Kind Donations
Understanding how to properly record your nonprofit's in-kind donations isn't just a tax necessity, it's also important for adhering to various state regulations and the Generally Accepted Accounting Principles (GAAP). Eventually, when your organization has to do a financial audit, it will be important to have accurate recording of in-kind donations.
The recording process starts with determining the fair market value (FMV), the price you'd pay if you purchased a service or good on the open market, using different valuation methods.
For straightforward goods, like a new iPad, check the list price on the manufacturer's website. For unique items, like custom artwork, compare prices of similar items on online platforms. If the donation is a service, ask the donor about their typical charges.
Once you've determined the FMV, record it in a separate revenue account in your organization's chart of accounts. Since in-kind donations don't alter your cash on hand, the net value should be zero. Record the FMV as both a debit and a credit.
You should also communicate with donors about their donations' values, making sure to integrate this information correctly into your accounting software. This guarantees accuracy, transparency, and compliance with rules and regulations.
In-Kind Donations and Taxes
Once you've got a handle on recording in-kind donations, it's time to tackle the tax implications for both your nonprofit and your donors. A key aspect of this is the deduction process. In most cases, in-kind donations are tax-deductible for donors. However, this comes with the IRS requirement of your nonprofit providing written acknowledgment letters. These letters should contain your nonprofit's name, EIN, the date the donation was received, and a description of the donated goods or services. Also, make sure to state that the donor didn't receive anything in exchange for their gift.
On your nonprofit's end, in-kind donations have to be included in your total yearly revenue when reporting on your Form 990. Donations like items worth over $25,000, historical artifacts, artwork, and vehicle donations worth $500 or more require additional paperwork. Always double-check regulations and adhere to all reporting requirements in your operating state.
The tax deductions can be a great incentive for donors to donate. Make sure you make it clear to your donors that they can also benefit from donations when it comes to their tax liability.
In-Kind Donations and Gift Acceptance Policies
In-kind donation acceptance becomes much simpler when your nonprofit has a well-defined gift acceptance policy in place. This policy stipulates the types of gifts your organization can accept and the circumstances under which they'll be accepted. It's an important policy for effective donor relations, helping avoid awkward situations when a well-intentioned gift can't be used.
Your gift acceptance policy also plays an important role in impact assessment. By clearly stating what can make the greatest difference, you're shaping the contributions towards your mission's needs. Additionally, incorporating this policy into your communication strategies can encourage more eligible in-kind contributions. Clearly communicate what not to give, but also guide your supporters on what they can do to genuinely help, creating a win-win situation for all parties involved.
Need Help Recording In-Kind Donations?
Recording and reporting in-kind donations can be a bit difficult at times. There are special circumstances that make determining the fair market value difficult. You may also be struggling to accurately report the donations in your accounting platform.
If you are looking for help with recording in-kind donations, along with proper bookkeeping and accounting for your nonprofit organization, the team at RP Finance can help! We are a team of expert bookkeepers and accountants that specialize in nonprofit accounting.
Reach out to us for a free consultation to meet with an expert and learn more about how we can help your organization account for donations accurately.
