Nonprofits routinely receive non-cash gifts, also known as in-kind donations, from donors who support the organization’s mission and programming. In-kind contributions are donations of goods, services or time instead of cash.
Fundraisers often auction off donated goods and services. Development officers receive real property, financial instruments, and other goods from donors that can be converted to cash or used by the organization directly to support its programs and operations. Local professionals often lend their time and talents at no charge.
When reporting financial statements based on generally accepted accounting principles (GAAP), it is critical for nonprofits to accurately capture and identify all gifts in kind. Reporting in-kind donations is required by auditors, and may also be a requirement of a nonprofit’s set terms and conditions by key constituents, lenders and grantors.
If a nonprofit only files a Form 990 and does not undergo annual audits, in-kind donations can be excluded from the form, but should still be properly recorded for internal purposes and accurate bookkeeping.
How To Know If A Donation Constitutes A Gift in Kind
When reporting the in-kind donations a nonprofit has received, it may not always be clear whether a perceived good or service actually constitutes a gift in kind. This is because goods can take on a variety of forms, such as:
- Goods and use of property for resale, such as a rental unit
- Items to be used specifically for auctions or other special events
- Office furniture, supplies and equipment
- Technology software and hardware
- Discounted or free use of facilities
- Financial securities that can be converted into cash or traded
Since the types of gifts in kind vary, it is important to have a policy in place that will allow your staff members to know which gifts can be accepted.
If a gift in kind is received and staff is unsure how to proceed, chances are that the gift should be further evaluated to determine how it should be accurately reported. It may be worthwhile to consider whether the gift is useful for the organization, as some donations may be more work than they are worth.
Additionally, GAAP requires nonprofits to report the fair value of donated services if the services demonstrate either of the following:
- The service enhances or creates a non-financial asset.
- The service required an individual or entity with specialized skills and would have been purchased had it not been donated.
Establishing The Value Of In-kind Contributions
When a nonprofit receives an in-kind gift, they must record it as revenue using the fair value of the gift and noting the date of receipt. Fair value is the price that you’d receive to sell an asset or be paid to transfer a liability.
You can determine the worth of a gift — or corroborate the value suggested by the donor — in a number of ways. For example, you might:
- Check the price you’d pay for a good on the open market
- Obtain quotes from competitors to determine the going rate
- Use a salary survey to determine the average cost of the skill level needed for the donated service
Once you choose a valuation method, apply it consistently and disclose it within your financial statements.
The nonprofit may rely on a good faith estimate by the donor if the item lacks a ready means of independent valuation (e.g., a work of art). An independent appraisal is required if the value exceeds $5,000.
When goods are sold at auction, the fair market value will adjust to the amount paid by the winning bid. If the donation and sale occur within the same fiscal year, the organization simply records the final valuation in its books. If receipt of the gift occurs in a prior fiscal year, any change in value will be captured as a gain or loss upon sale.
It is recommended that nonprofits do not provide anything that documents a value to the donor unless there is a formal appraisal. A thank you letter can state a description of what was given but, unless there is an appraisal, it is up to the donor to document the value and the organization should not provide anything that appears to give validity to the value the donor has provided.
The donor should be encouraged to consult with an independent tax advisor to determine what, if any, tax benefits come with their generous contribution.
If your nonprofit has any questions about in-kind donation financial reporting in Springfield Missouri, consult your tax advisor at Schultz, Wood, & Rapp.