Nonprofit Tax: In-Kind Contributions


We often find that nonprofit organizations struggle with certain concepts related to donated items or services. In-kind donations are non-cash gifts that may take a variety of forms: new or used goods to use or sell, vehicles or real estate, services like marketing and website hosting, interest-free or below-market loans, debt forgiveness, remainder interests, and life insurance policies, among other things. Organizations that receive these gifts are generally obliged to recognize them at fair market value at the time of receipt, though each gift presents different valuation challenges.

Valuation
The Financial Accounting Standards Board (FASB) Fair Value Measurement (FMV) codification (ASC 820) 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,” meaning quantity, quality and appropriate discounts (e.g. for the freshness of perishable goods) must be considered. For example, the FMV of used clothing would be what typical buyers would pay for items of similar age, condition and style — usually much less than new. In addition, donated real estate with a covenant restricting its use to open space conservation would be worth less than developable land. In-kind donations of $5,000 or more require the donor to obtain an independent appraisal, which may assist the receiving organization. While prices for new items are easily found, valuing items for which there is no ready market, as with used goods, is less simple. It may be helpful to look up completed sales of similar items on a site such as eBay, or to estimate the value based on the cost to purchase similar goods or services.

Resources for determining FMV include IRS Publication 561, the Salvation Army Donation Valuation Guide, and the free Turbo Tax “It’s Deductible” app.

In-kind gifts contributed for fundraising purposes, such as items to be sold at auction or raffled, require a two-step recognition process. First, the gift should be recognized as a contribution measured at FMV. Then, per FASB ASC 958-605-25-20, any difference between the initial FMV estimation and the actual amount received at sale should be recognized as an adjustment to the original amount. For example, an item valued at $300 and sold for $500 would require a $500 debit to cash and a corresponding $300 credit to the asset account and a $200 credit to contribution revenue. On the other hand, if the $500 asset sells for only $100, the correct entry would be a $100 debit to cash, a $400 debit to contribution revenue and a $500 credit to the asset account. Though bidders at charity auctions tend to inflate their bids to benefit the organization, meaning the auction price will not actually reflect FMV, FASB permits organizations to use that price as the asset’s value.

There are a few special cases where FMV is not used. These include when the donated item has no future economic benefit or service potential to the organization and cannot be sold. Note that this is different from a program-inappropriate item that the organization chooses not to use or sell. In the latter case, as when a fur coat is donated to an anti-fur organization that will only destroy the item to keep it off the market, the organization should recognize the FMV of the coat and then deduct the value as a program expense.

Substantiation
Gifts of property valued at less than $250 may be, but need not be, acknowledged with a contemporaneous written receipt, unless the contribution was received partly in exchange for goods or services from the nonprofit organization. Such quid pro quo gifts greater than $75 require a written disclosure statement from the organization to the donor. The disclosure should inform the donor that any tax deduction for the gift is limited to the value of the gift in excess of the goods or services received in exchange.

For property contributions of $250 or more, the donee organization should provide a written receipt that describes the donated property (but does not necessarily estimate its value) and includes the name of the organization and date of the contribution. The receipt should also indicate whether the organization provided any goods or services to the donor in exchange for the contribution and, if so, provide an estimate of the value of those benefits.

While donors have additional reporting requirements for contributions over $500, organizations generally do not — until the donor claims a deduction of $5,000 or more or if the property contributed is a vehicle, boat or airplane. When the value of such a donation exceeds $500, the organization must provide the donor with written acknowledgement within 30 days and file Form 1098-C (Contributions of Motor Vehicles, Boats and Airplanes) with the IRS by February 28. Further, the organization must indicate on Form 990, Part V, that it has received such a contribution. If the organization disposes of donated property valued at $5,000 or more within three years of its donation, the organization must notify the IRS using Form 8282 (Donee Information Return). This form is not required if the organization consumes or distributes the property as part of its tax-exempt purpose.

For more information, see IRS Publication 1771, “Charitable Contribution Substantiation & Disclosure Requirements.”

For questions about this article, please contact Donita Joseph at djoseph@windes.com or Megan Lasswell at mlasswell@windes.com or toll free at 844.4WINDES (844.494.6337).