A Gift By Any Name
No matter what you call it, a gift is a gift is a gift. In the nonprofit world, there’s a lot of terminology for the same thing, though there are some differences between things that may seem the same. It can get confusing.
A contribution is often called a donation, membership, gift, grant, pledge, or in-kind donation. Still, all refer to a transaction between nonprofit and donor in which the donor offers money or assets to an organization with no conditions. They are nonreciprocal and voluntary.
Exchanges vs nonexchanges
If your organization is given money but you owe something in return, this is an exchange. This might include things like branded merchandise. Grants, membership fees, and special events can and often are one or the other or even a mixture of the two. Knowing how to categorize them is essential to the accounting process, and there’s lots of guidance available with more detail if you research Accounting Standards.
Contributions masquerading as gifts
Occasionally, there are donations that appear to be gifts but are not categorized as such. If a gift benefits a specific individual, it is not a tax deduction. If someone donates toward a person or family, the money is considered funds held for the beneficiary and the money recorded as a liability on the balance sheet until it is paid to the beneficiary.
If there’s an exchange, that is not considered a tax deduction either, though the IRS offers an exception for goods and services with insubstantial value.
Grants, pledges, and in-kind donations
Grants are funding that comes from a private source, which is typically a government agency or foundation. Usually, they require an extensive application process and are large amounts of money. Sometimes, they have restrictions, including a “spend by” date, report of use, etc. Other times, they come without restrictions.
A pledge is a promise that someone will donate in the future. The income is treated, on a balance sheet, the same as cash. Pledges often occur during things like radio fundraising drives in which people agree to donate monthly.
An in-kind donation is usually a gift of a service, physical gift, or gift of something intangible like rent.
How you record each of this is dependent upon the system you establish with your accountant, and may include many separate accounts. You are required by the IRS to present income in major categories, but there’s a lot of choice that goes into it too.