As a nonprofit organization, you’re required to record and report not only cash donations but in-kind contributions, too. Sound like a lot? That’s because it is!
In-kind gifts make up a majority of donations to nonprofits, and these charitable contributions no doubt keep a nonprofit functioning. That’s why they’re always welcome!
But recording them? That’s a different story.
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Recording in-kind donations for nonprofits is a mundane but crucial task that comes with its share of challenges—especially if you’re not aware of the rules. To top it off, each type of in-kind gift comes with its own set of reporting best practices.
Let’s back up just a bit and explain exactly what an in-kind donation is. An in-kind donation is a non-cash gift to a nonprofit. If you listen to NPR, you’re definitely familiar with an in-kind donation, as they routinely suggest making an in-kind donation of your used car as a way to help them stay afloat.
So, in-kind donations come in many forms and include contributions of goods, services, and time.
In-kind donations for nonprofits include goods and services that can be used to support their cause. This important rule can help determine whether to recognize specific non-cash donations. But more on that later.
You should make sure you’re able to record in-kind donations in your Chart of Accounts, and here are some of the major types of accounts for in-kind donations for nonprofits:
In-kind goods are tangible entities that can be utilized or resold for cash. These comprise all used, new, or loaned entities like food, clothing, furniture, appliances, books, equipment, land or office space, tradable financial securities, and vehicles.
In-kind services include those that would help a nonprofit directly or indirectly support its mission. These include all services donated by individuals, small or large businesses, corporations, institutions, and organizations. Some examples of in-kind services are branding, publishing, accounting, legal, teaching, babysitting, and catering.
Is a nonprofit required to record all in-kind services? No. Only services that fulfill the criteria established by the Generally Accepted Accounting Principles (GAAP) need to be recorded. But when in doubt about what you should or shouldn’t keep track of, air on the side of caution: keep track of it!
Imagine a nonprofit having to spend a majority of its working capital or cash donations on office rent or vehicles. That would amount to significant expenses.
Fortunately, many individuals and organizations provide nonprofits with free or discounted rent on office spaces so they can utilize their valuable resources for other expenses. They also offer the use of other tangible assets like vehicles.
Financial assets like securities and stocks are also a part of in-kind donations for nonprofits. But for these to be accounted as contributions, they must be assets of value to the nonprofit, or assets that can be resold in exchange for money.
Typically, their worth is estimated according to their market value on the day of the contribution.
Donated Item Sale Proceeds
What about items that are donated to nonprofits only to be resold? What items are included in this category?
For example, a nonprofit might receive tickets to a concert or sporting event, which can be resold. As an example, these may include assets like boats and cars that can be resold at a charity auction to make money.
In this case, GAAP requires that the value of the contribution be estimated by the amount received on reselling them.
In-Kind Special Events Donations
Donations received at special events like fundraisers come under this category. For special events, nonprofits would also require a separate item under the expenses category to offset the expenditures required for arranging and conducting these.
To evaluate the impact of special events, it makes sense to categorize in-kind donations received at special events separately from those received elsewhere.
Why You Should Record In-Kind Donations for Nonprofits
Does your nonprofit prepare financial statements using GAAP? If so, it must also record and report in-kind contributions in compliance with GAAP accounting standards. Some state laws also require in-kind donations for nonprofits to be reported according to GAAP.
If an organization is audited by an independent accountant, it may have to do the same. At times, lenders and grantors may also require nonprofits to do so.
Form 990 requires in-kind goods to be reported but not in-kind donations. For quick reporting ease, it makes sense to classify in-kind donations into the categories mentioned above.
Most importantly, recording and reporting in-kind donations for nonprofits helps organizations understand its impact on the program. And remember—if in-kind donations constitute a majority of a nonprofit’s programs, then not recognizing them will result in under-reporting true impact. You don’t want that!
Here are a couple examples why: food banks that routinely receive food supplies must report them to avoid under-reporting their impact. Similarly, shelters that receive clothes, food, and other supplies must recognize these in order to understand their true value.
Which In-Kind Donations for Nonprofits Should Be Recognized?
Not all in-kind contributions should be recognized. Here’s a quick guide to determining the in-kind donations for nonprofits that need to be reported:
In-Kind Services: What to Recognize
GAAP requires the fair value of donated services to be reported. But there are conditions that donated services need to fulfill to be recognized.
For starters, all donated services that create a non-financial asset or improve or augment it are to be recognized.
Similarly, all donated services that are provided by entities should be recognized. Services that would have been purchased had they not been donated should be recognized, too.
Those services that do not meet any of the above conditions will be recognized only if these are fulfilled by an affiliated organization. Even specialized services performed by board members will not be reported unless they would have been purchased had they not been donated.
But that’s not to say that you can ignore tracking all volunteer hours. Tracking volunteer hours helps evaluate and record proof of community support, which is important for sponsors and other parties.
For in-kind gifts to be recognized, they must be valuable for the nonprofit. These gifts should be reported only if they have been donated unconditionally and without receiving anything in return.
Goods that cannot be used or resold shouldn’t be recognized—like rotten food supplies or expired vouchers that have no value for the nonprofit. While the kind sentiment might be there, the value is not, so it’s okay to politely decline such donations.
In-Kind Services: How to Determine Value and Record
In the case of in-kind services, the fair value is estimated by determining the hourly rate for the service and then multiplying it by the number of donated hours.
For instance, if the hourly rate for accountants is $75 and they have donated 20 hours of service, then the estimated fair value of the donated accounting services is $1,500, which would be recognized as contribution revenue.
But what happens when services are provided at a discounted rate? In this case, the difference between the market rate and the discounted rate would be recognized as contribution revenue and professional service expense.
In-Kind Gifts: How to Determine Value and Record
The value of in-kind gifts should be estimated at fair market value as shown on the date of receipt. The value is then recognized as contribution revenue, and the other side of the entry could be an asset or expense (depending upon the service) in the period that the gift is received.
When an unconditional promise is made to donate non-cash items, it’s essential to record it as contribution revenue in the period that the promise is made. This principle is to be followed even if the items haven’t been received at the time the promise is made.
Upon receipt of items in the future, the fair value should be recognized as an asset in the period of the contribution and an expense in the period of the benefit.
In the case of tangible assets, the fair value is typically calculated by the price that would have to be paid in the market.
For instance, if medical supplies are received, the fair value is estimated by determining the market price of the supplies. The value of the donation is then listed as a contribution and related asset/expense.
Disclosures to be Included in Financial Statements
In the case of donated services, nonprofit organizations should disclose the programs or activities for which in-kind services are used. The nature, extent, and amount recognized as revenue in the period should also be disclosed in the statements.
We recommend that nonprofits disclose services that are received in-kind, even if they aren’t able to be recognized as a contribution. For example, if volunteer hours are spent caring for the elderly at a hospice location and were not recognized as revenue, these can be disclosed in the statements.
Which In-Kind Donations for Nonprofits Should Be Reported in Form 990?
Tangible in-kind gifts are required to be reported in Form 990. Property gifts should be reported as grants, contributions, or membership fees. In the case of contributions that exceed $25,000, nonprofits are required to submit extra paperwork. Similarly, if the non-cash donations include art or historical artifacts, extra paperwork is required.
In-kind services don’t need to be reported in Form 990, but their value should be shown as reconciling items.
Have You Considered Nonprofit Bookkeeping Software?
We know we just took you on a rapid tour of in-kind donations for nonprofits. Did any or all of it sound daunting? Don’t worry—there’s an easier way thanks to nonprofit bookkeeping software like Botkeeper.
Botkeeper is fast, affordable, scalable, and almost 100% accurate thanks to human-assisted AI—software driven by advanced automation and skilled accountants.
Botkeeper can seamlessly integrate with other software platforms you’re already using, like QuickBooks, and effectively categorize your in-kind donations so you don’t have to.
With our team of accountants reviewing reports, you’ll have confidence in your ability to remain audit-ready while meeting the Financial Accounting Standards Board’s (FASB) expectations of transparency, too.
If you haven’t considered automating your bookkeeping and accounting needs for your nonprofit, let’s talk!