Nonprofit income comes from a variety of different sources. One of the main sources are charitable donations from individuals, small businesses, corporations, etc. These donations don't have to be cash. They can be what's called “in kind.” The most common in-kind donations are contributions of goods and services. These types of donations have to be reviewed carefully and accounted for properly. In this article we are going to discuss best practices and how to manage in-kind donations.
Types of In-Kind donations:
Goods: Donated goods can be intangible or tangible. Some examples include: clothing, office equipment, furniture, books, cars, copyrights, patents, etc. These goods can either be used or new.
Services: In kind services are professional services donated to the nonprofit to further its mission. Some examples include: legal, accounting, marketing, construction. Essentially, the service provider donates their service to the nonprofit at no charge.
Reporting In-Kind Donations:
Many organizations don’t record in kind donations because there's no cash exchange and there's usually a lack of know how. While accounting for these types of donations can be tricky, there are certain rules established by GAAP and the IRS. By leaving out in-kind donations, you also incur the risk of underreporting your income and impact.
If your nonprofit prepares financial statements according to GAAP and is subject to an annual audit by an independent accountant, then all in-kind donations must be reported. If this is not the case and your organization is only responsible for filing form 990, these items are excluded. However, it is best practice for management to internally track these donations. This level of detail should be included in the management reporting as it will help with decision making. For example, take an organization like Goodwill. Furthering their mission heavily relies on the goods donated to their organization. Not accounting for these donations significantly misrepresents their financials and how they are able to measure their impact.
Let's discuss the detail of how both in-kind goods and services should be reported on your financial statements.
In-kind goods are valued at fair market value on the date of the donation. As for in-kind services, GAAP requires the fair value of donated services to be recognized on the financial statements if the services meet either of the following criteria:
They require specialized skills, are provided by entities or persons possessing those skills, and would be purchased if they were not donated (ex: attorney, accountant, contractor, etc).
The services create or enhance a nonfinancial asset.
These types of services would also be valued at fair market value which is determined by what the service provider would normally charge for similar work.
Your organization’s chart of accounts should separate these items for reporting purposes. For example:
In-kind Goods
In-kind Services
In-kind Rents
In-kind Special Events Donations
To effectively manage in-kind donations, you'll need to establish a process for accepting, documenting and acknowledging such gifts. Acknowledging gifts can be done by providing the donor with a written acknowledgement. It should include:
the name and EIN of the organization
the date received and
a detailed description of the in-kind contribution
As a nonprofit, understanding how to manage in-kind donations is key to proper reporting. It also largely depends on the use of the financial statements (audit vs. tax reporting) but let’s not forget that donations are the lifeblood of many nonprofit organizations. As a result, it's important to remain compliant, ensure proper reporting, and most of all thank and acknowledge the donors.