Effectively Using and Reporting In-Kind Donations

By March 6, 2020 Not-for-Profit, Tax
In-Kind Donations - Box of donations donated to a not-for-profit

When we think of donations to a charitable organization, one of our first thoughts goes to some type of monetary donation. But there is another type of contribution that is effective in a different way: in-kind donations.

Too often in-kind donations are an overlooked method of fundraising, but at the end of the day they can really help a not-for-profit (NFP) organization cut costs and better utilize the funds they do receive.

Are you taking advantage of in-kind donations for your not-for-profit? And are you instilling donor confidence by properly and accurately reporting them on your financial statements?

What is an in-kind donation?

In-kind donations, also known as gifts-in-kind (GIK) are noncash contributions made to a not-for-profit organization. These contributed nonfinancial assets include fixed assets such as land, buildings, and equipment; the use of fixed assets or utilities; materials and supplies, such as food, clothing or pharmaceuticals; intangible assets; and/or recognized contributed services.

Certain types of NFPs, such as thrift stores and international relief organizations, may receive significant amounts of in-kind donations.

Examples of in-kind donations include:

  • A designer creates your organization’s website for free;
  • A marketing expert manages your organizational branding pro bono;
  • A company donates office equipment or computer hardware or software that your team can use;
  • A venue allows your NFP to use their facilities for a fundraising event;
  • Donations of prizes for raffles, auctions, and other fundraising activities;
  • Donations of food and beverages at fundraising events (like fun runs, for example);
  • A company loans the skills and/or services of some of its employees to support the needs of your organization;
  • A company provides discounted labor or materials for construction/capital projects; or
  • Donations of goods and property that your organization can resell.

In-kind donations are an important aspect of some not-for-profit organizations’ programs. Through in-kind donations or contributions, organizations receive needed supplies, donors may get a tax deduction, and items that might otherwise be discarded are instead put to good use.

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What are the benefits of an in-kind donation?

There are a number of benefits if you are able to secure in-kind donations for your organization.

One of the most prominent advantages of an in-kind donation is the ability to reduce the total costs of delivering programs, holding fundraising events, or performing capital projects. By lessening the total funds needed to facilitate these activities, it allows that money to go towards other aspects of the organization.

Companies and individuals can be highly receptive to providing in-kind products or services – often more so than corporate giving donations or event sponsorship.

In-kind donations provide a viable alternative to making a cash donation while effectuating a considerable impact on your cause. Furthermore, donations to qualified charities and NFPs are tax-deductible expenses that can reduce taxable income and lower the donor’s tax bill.

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What are the risks of an in-kind donation?

The benefits of an in-kind donation are great, but there is some risk as well. One notable risk is the donation of a in-kind donation that actually leads to greater expenses and hassle than it is worth.

For example, accepting certain gifts might run counter to your organization’s mission and values or you might not be equipped to manage and maintain the value of such gifts, such as real estate.

In order to determine whether or not a in-kind donation is worthwhile, you can create your own gift acceptance policy. A written policy can simultaneously help manage your donors’ expectations and provide guidelines for staff and board members who might be asking for or receiving contributions.

Your gift acceptance policy should include:

  • Specific types of gifts that are appropriate and not appropriate;
  • Any thresholds to gift acceptance, such as donations of a certain amount or value over a specific period of time;
  • Details about how gifts are evaluated and how unacceptable gifts are handled;
  • A statement explaining that prior to accepting certain types of gifts, such as real estate, your not-for-profit will conduct a review and seek legal advice as needed; and
  • Whether gifts will be anonymous.

It may be in your best interest to post your policy on your organization’s website or make the policy available in hard copy.

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How do I recognize in-kind contributions for tax purposes?

Since 1993 and the issuance of standards for recognizing contributions at their fair value, NFPs have been challenged to appropriately measure the value of the myriad of contributions they receive.

It has long been a source of controversy as the opportunity for deception in financial statements is great. Thus, watchdog agencies and state attorneys general continue to closely scrutinize the representation of in-kind donations on financial documents and reports. This is one area that NFPs should navigate with care.

In order to properly recognize and report in-kind donations, you must first calculate the fair value of the items or services you receive.

Determining the fair value of cash and marketable securities is typically straightforward, but for most nonfinancial assets (for example, food, supplies, used clothing and household items, intangibles, medical equipment, and pharmaceuticals), the valuation process is less clear.

In 2006, the Financial Accounting Standards Board (FASB) issued its fair value measurement standard, known as Accounting Standards Codification (ASC) 820, Fair Value Measurement, as a means to address measuring and reporting both financial and nonfinancial assets.

Accurate valuation and revenue recognition of nonfinancial gifts, or for our discussion, gifts-in-kind, are a challenge, particularly for in-kind donations that are used by the NFP for program activities and not subsequently sold in the marketplace. (In cases where the organization sells the products in the marketplace, sales data provides sufficient valuation evidence.)

The basic guiding principles for determining fair value of in-kind contributions have not changed over the years. However, over time NFPs’ understanding of the characteristics and issues surrounding in-kind donations has matured, best practices have developed for addressing issues, and market transactions are evolving.

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How do I determine fair value measurements for in-kind donations?

The FASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

However, a not-for-profit receives these assets as a contribution, not as a market participant. Thus, the organization has a number of hypothetical questions to ask, such as: Which market would it use if it were to sell the goods? Would the goods be sold as a retailer, wholesaler, or manufacturer, or would they be sold in some other market?

Certain in-kind gifts may not have a readily determinable marketplace, but typically, they have a base utility that is marketable to someone. NFPs should consider that base utility when determining market values for in-kind donations.

ASC 820 regarding fair value measurements lists four areas to consider when determining the value of an in-kind donation: 1) market participants, 2) the principal (or most advantageous) market, 3) inputs to valuation techniques, and 4) use of hypothetical markets. Please read the guidelines presented in ASC 820 for more specific information.

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How do I report in-kind contributions?

Not-for-profits must report their donations and program expenses on filings with the Internal Revenue Service (IRS) and relevant state agencies.

More specifically, NFPs must report the fair value of nonfinancial contributions on Form 990, Return of Organization Exempt from Income Tax, as donated revenue, as well as list the value of the in-kind donation it distributes as a program service expense (if it meets certain IRS criteria).

Form 990 includes important information on how much support an NFP received from the public or other sources, how the organization spent its money, and describes its assets and liabilities.

Potential donors, regulators and NFP watchdog groups pay special attention to how an organization divides its money amongst three important categories: program service expenses, management and general expenses, and fundraising expenses.

For example, the Better Business Bureau suggests that an NFP should, in most circumstances, spend at least 65% of its total expenses on program activities.

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What is the latest news surrounding in-kind donations?

In February 2020, the FASB issued a proposed Accounting Standards Update (ASU) to improve the transparency in how not-for-profit organizations present and disclose contributed nonfinancial assets.

The proposed ASU, Not-for-Profit Entities (Topic 958), would require not-for-profit organizations to present contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash or other financial assets. It would also require not-for-profits to disclose:

1. Contributed nonfinancial assets received disaggregated by category that depicts the type of contributed nonfinancial assets, and

2. For each category of nonfinancial assets received:

  • Qualitative information about whether the contributed nonfinancial assets were or are intended to be either monetized or utilized during the reporting period and future periods. If utilized, a description of the programs or other activities in which those assets were or are intended to be used.
  • A description of the donor restrictions associated with the contributed nonfinancial assets.
  • The valuation techniques and inputs used to arrive at a fair value measure, including the principal market (or most advantageous market), if significant, in accordance with the requirements in Topic 820, Fair Value Measurement.

Comments on the proposed ASU are due by April 10, 2020.

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How can Squar Milner help?

We have a long history of working alongside not-for-profit organizations throughout California and beyond.

Our robust Not-for-Profit industry group is comprised of tax and audit professionals with a vested interest in making sure your organization is making the most of every dollar and donation.

Whether it be helping you prepare tax returns, auditing financial statements, or developing comprehensive tax strategies to prepare for the future, we are here to help.

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Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

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