As of April 2022, we updated this article based on new information. Please reference the updated article here.
Nonprofits routinely receive non-cash gifts, called in-kind donations, from donors who support the organization’s mission and programming. Fundraisers make generous use of donated goods and services to cover event costs and fill their portfolio of auctioned items. Development officers graciously receive real property, financial instruments, and other goods that can be converted to cash or used by the organization directly to support its programs and operations. Subject matter experts often lend their time and talents at no charge to spare the organization the cash outlay for such services.
If your nonprofit prepares financial statements according to Generally Accepted Accounting Principles (GAAP), then all in-kind donations must be captured and reported appropriately in the organization’s financial records. This standard applies to organizations that are subject to an annual audit by an independent accountant. It may also be required by state law or by terms and conditions set by lenders, grantors, and other key constituents. If the organization is not audited and only files a 990, these items are excluded from the Form 990 but can be useful internally to measure the community’s contribution to the organization.
What constitutes an in-kind donation?
In-kind donations are goods and services used to carry out the mission of the nonprofit. Goods can take many forms, including but not limited to:
- Financial securities that can be traded on the open market and converted to cash
- Free or discounted use of facilities
- Office furniture, equipment, and supplies
- Computer hardware and software
- Goods and use of property (e.g., vacation rentals) for re-sale
- Items to be used in auctions or other events
Nonprofit organizations should have a gift acceptance policy that will help the staff know which types of gifts are acceptable and which ones need further evaluation. Every non-cash gift should be evaluated to determine its usefulness to the organization before it is accepted. Otherwise, the organization could end up with something that requires a lot of work for little value.
Additionally, nonprofits often have large volunteer contributions to the mission of the organization, which could include accounting and legal services, IT, fund-raising events, and even volunteering for program or administrative activities within the organization.
GAAP requires the fair value of donated services to be recognized in the financial statements if the services meet either of the following criteria:
- They create or enhance a nonfinancial asset.
- They require specialized skills, are provided by entities or persons possessing those skills, and would be purchased if they were not donated.
Services that do not meet either of these criteria should not be recognized unless the services are performed by employees of an affiliated organization. Donated services that meet the above criteria should be recognized at fair value. The value of services is recognized as a contribution when the services are provided and the other side of the entry would be to the asset or an expense depending on the services provided.
Donated services that create or an enhance a nonfinancial asset do not need to be specialized in order to be recognized, but if the services provided to not create or enhance a nonfinancial asset then it does need to be a specialized skill to be recognized. For example, during a building project, multiple services could be provided including contractors, engineers, painters, etc. The value of all these services should be capitalized as a cost of construction because they create or enhance a nonfinancial asset.
Even board members may fall outside the bounds of in-kind treatment despite the wealth of skills, expertise, experience, and community connections that they bring to the table. Unless they perform a specific role for which the organization would have had to pay for services, they are simply committed volunteers. That being said, most nonprofits track their volunteer hours to provide evidence of community support to their funders and other constituents.
How should in-kind donations be reported?
Each donation of a good or service should be recorded at the fair market value upon receipt by the organization. In the case of a marketable security (e.g., publicly traded stock or bond), that value can be determined readily by capturing the day’s closing valuation. Market prices for facilities, furniture, equipment, supplies, technology, and many other goods are also easily assessed. Professional service providers and contractors can provide their standard rates based on work with other clients.
The organization may rely on a good faith estimate by the donor if a good 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.
None of the foregoing precludes a heartfelt expression of appreciation for each donor’s gift. It is recommended that organizations 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 advisor to determine what, if any, tax benefits come with their generous contribution.
Meet the Author
Andy Maffia, CPA
Aldrich CPAs + Advisors
Andy Maffia has more than 15 years of experience in public sector accounting, with a focus on auditing nonprofit organizations, organizations subject to a single audit under the Uniform Guidance, agreed-upon procedures and consulting work, as well as assurance audits for closely-held companies. He currently sits on the board of directors and serves on the... Read more Andy Maffia, CPA
- Nonprofit organizations
- Public sector
- Government entities
- Certified Public Accountant