Reporting In-Kind Donations: What Nonprofits Need to Know

Nonprofit organizations are always looking for new opportunities to reduce expenses and earn new donations to bolster their budgets. In-kind donations provide the opportunity to do just that. These gifts provide the chance for nonprofits to bypass purchasing items and instead receive what they need directly from supporters.  

However, there is a lot of confusion around in-kind donations. What qualifies as an in-kind donation? How should nonprofits solicit these valuable gifts? How do you record them? Do donors need receipts? 

In this guide, we’ll cover these questions and more, providing you with an overview of in-kind donations and specifically discussing how they should be reported in your nonprofit’s accounting system. We’ll expand on this information by discussing the following topics: 

• What are in-kind donations? 
• Preventing unwanted in-kind gifts
• Recording in-kind donations
• Cultivating in-kind donations

Once you fully understand these important gifts, your organization can start using them to reduce expenses, increase your revenue, and better serve your mission. Let’s get started. 

What are in-kind donations? 

An in-kind donation is essentially any non-monetary gift made to a nonprofit organization. According to Jitasa’s in-kind donations guide, “these nontraditional donations include the transfer of any asset, usually goods or services, and can be contributed by individuals or other organizations and companies.”

This means that there are two primary types of in-kind donations: goods and services: 

• Goods: This category includes donations of items, whether new or used, contributed to the nonprofit organization. These items help the nonprofit advance its mission in some way. For example, a food pantry might accept donations of canned goods to serve the community.
• Services: This includes donations of professional services that the organization would otherwise need to pay for. For example, a marketing professional might donate their services to write promotional emails for the organization’s upcoming event, or a lawyer might provide free advice to handle a specific legal situation. 

This means that nonprofits can use these gifts to bypass expenses. The food pantry discussed earlier would need to purchase cans of food for their community if their supporters didn’t directly donate them. And the second nonprofit would need to pay for marketing services or legal services if the donation was not contributed in kind. 

Examples of in-kind donations

Some examples of commonly contributed in-kind donations include the following: 

• Cars. If your nonprofit accepts donations of cars, you need to be careful in their reporting because they’re recorded differently than other in-kind contributions. Research thoroughly how to record these gifts on the IRS website. 
• Stocks. According to Infinite Giving’s stock donation guide, gifts of stock provide advantages to both nonprofits and supporters. Supporters receive a tax deduction on the entire stock value without paying capital gains tax, while nonprofits receive a valuable gift that can either be held for additional returns or sold for monetary value. 
• Venue space. If your organization is hosting an event, there may be venues willing to donate their space for a good cause. Even if they don’t donate the space outright, they still may provide a discount for nonprofits. 
• Graphic design services. Graphic design is essential for nonprofit marketing, but the services can be expensive. Some graphic designers will contribute their services in kind to help nonprofits promote specific campaigns or initiatives. 
• Legal services. Legal services are also generally expensive, but lawyers may contribute their time pro bono for worthwhile causes. 
• Technology. Technology can add up, both software and hardware alike. Especially education-based nonprofits can benefit from the gift of computers or other systems. And other nonprofits can benefit from the gift of software. 
• Auction items. When nonprofits host auctions, one of the best ways to receive auction items is by asking for in-kind donations. Local businesses are often happy to contribute to these events, especially if it means they’ll receive marketing benefits from the event. 

Preventing unwanted in-kind gifts

One of the most challenging scenarios that many organizations could imagine would be if a well-meaning donor gave an in-kind donation that you have no use for or cannot accept for one reason or another. In this case, your organization would not only not gain a contribution from the interaction, but you could also insult the donor by refusing the gift. 

This is why nonprofits should develop a gift acceptance policy to spell out the contributions that would be most helpful for the organization and those that you cannot accept. 

For example, a nonprofit might outline that they can accept stock donations and prefer contributions of unopened personal care items to support their mission, but they may not accept gifts of livestock.

This type of policy provides organizations with grounds to refuse unwanted donations as they can reference the policy if a donor tries to give an unhelpful gift. Because the nonprofit has predetermined grounds to refuse the donation, they’ll also be less likely to insult the well-intentioned donor, preserving the relationship for the future. 

Recording in-kind donations

Just as you need to record all of the monetary donations contributed to your nonprofit, you’ll also need to keep track of those gifts made to your mission in kind. They’ll need to be recorded as part of your fundraising initiatives, but also as a part of your accounting practices. 

Why it’s necessary

If donations are made in kind and there’s no direct transfer of money, why should your nonprofit record them? The simple answer is that it’s required by the generally accepted accounting principles. But recording in-kind donations is also required for: 

• Providing supporter tax deductions. In-kind donations are tax deductible for the supporter who contributes the gift. Therefore, you need to have records of the value of the gift and you’ll need to provide a receipt for their own tax records. 
• Filing your nonprofit’s tax forms. In-kind donations are required to be reported as a part of your annual Form 990. Therefore, to remain compliant with IRS regulations, you’ll need to have records in your system of the various in-kind contributions you accept. 

Incorrect reporting of your in-kind contributions will be noted if your organization undergoes a nonprofit financial audit. Therefore, your nonprofit should ensure you have policies and evergreen procedures that allow you to record in-kind donations properly whenever they do occur. This will help your audit run more smoothly. 

Determining gift value

When you record your in-kind donations, you’ll also need to record an approximate value for that contribution. FASB guidelines dictate that you must use a fair market value, which is defined as “the price that would be received to sell the asset or paid to transfer the liability.”

If you’ve ever provided receipts for auction item procurement, you’ve seen and determined fair market value before! The process to determine the fair value of in-kind donations is just the same. 

It’s often easier to determine the value of in-kind donations of goods. If the item still has the tags on it, you’ll simply value the good the same as the price tag. If the gift is used or no longer has the tags accompanying it, you can often look up the value of the item online. 

Determining the fair market value of services is often more challenging. In this case, you should ask the professional donating their time what their usual hourly rate is. Then, they’ll need to record the number of hours they spend working with your organization. Multiply the rate by the hours they work and you’ll find the value of the service. For example, if the hourly rate of a lawyer is $100 and they spend 10 hours working pro bono with your organization, the value of the service would be $1,000. 

Where to record donations

Your in-kind donations should be recorded in the same place as the rest of your nonprofit’s donations: in your chart of accounts. However, while you may record financial contributions as debits for your accounts, your in-kind donation contributions should be listed as both debits and credits, ensuring the net value of those gifts equals zero in your accounting solution. 

Once these gifts have been recorded in your chart of accounts, they’ll easily be included in your other reports and statements, such as your statement of activities, and their value will be incorporated when you file your tax forms. 

Cultivating in-kind donations

The process to cultivate in-kind donations is not very different from the process to cultivate the average monetary donation for your nonprofit. You’ll still need to set goals for the contribution, solicit it specifically, and thank your donor for their generosity. 

Here are the steps to take when cultivating in-kind donations for your nonprofit: 

1. First, you’ll need to consider the in-kind donations that would be most helpful for your mission. Do you need canned foods? Legal services? Marketing materials? Personal care items? Event space? Or something else?
2. Next, consider who will be most likely to have that item on hand to contribute to your cause. In general, is it your base of current supporters? A specific professional whose service you require? Or a company or corporation? 
3. After you’ve determined who will most likely have the materials you need, comb through the donor data already saved in your CRM. Consider if there are already individuals or companies that you can reach out to solicit the in-kind donations you need. If there is no one, conduct some prospect research to find new potential supporters. 
4. Then, reach out! Be specific about your in-kind donation request. Tell the supporter exactly what you need as well as how it will benefit your organization’s mission. 
5. Don’t forget to say thank you. Thank your supporters for their gifts just as you would a monetary donation and keep them updated about the impact of that contribution. 

Those who contribute in kind to your organization are just as important and valuable as those who give money to your mission. Therefore, they should be treated with as much stewardship and gratitude as all other supporters. Not only that, but they may be willing to give money to your organization in addition to their in-kind gifts. Don’t be afraid to ask! This is a great way to get your board involved in fundraising as well – let them thank your donors and ask for a further gift. 

In-kind donations help nonprofits in different ways depending on their mission and the gifts they receive. If you’re part of a new nonprofit looking to file legal paperwork to obtain your charitable status, you might benefit most from in-kind pro bono work from a lawyer. Meanwhile, if you’re part of a well-established food bank that works with a large homeless population, you might benefit most from mass numbers of canned goods and personal care items. 

Consider your organization’s mission and how in-kind donations could help you advance your purpose. Then, make sure you have the systems and processes in place that will allow you to record those generous donations once you’ve received them. Good luck!

 

 

Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not for profit organizations.