In-Kind Donations | Everything Your Nonprofit Should Know
Tuesday, November 23, 2021
Imagine: you’re driving down the highway on your way to work listening to the radio. One of your favorite songs comes on, so you crank up the volume. After the song ends, there’s a commercial for a nonprofit in your area with a boisterous spokesman who gives the following announcement:
Your car could save a child’s life! Donate your car today and you could save a child like Timmy. Timmy is an 8-year-old boy who has been battling cancer for the last two years. He wants to be a firefighter when he grows up and his favorite sport is basketball. Help Timmy make his dreams come true.
You start thinking about it. Frankly, your car is fairly old and you could use a new one and Timmy does sound like a worthy cause. But how would the car actually help Timmy? Surely he won’t be driving it. And would you get any kind of tax credit for the donation? Is it not better just to donate cash?
The donation of a car in this type of situation is considered an in-kind donation and it can be just as useful for nonprofits as cash gifts.
In this guide, we’ll cover these types of donations in detail, explaining how nonprofits can use in-kind donations to advance their missions, why these gifts matter for fundraising strategies, how to make the most of them, and how nonprofits like yours need to report these gifts.
Table of Contents
- What is an in-kind donation?
- Importance of In-Kind Donations
- Dangers of In-Kind Donations
- In-Kind Donation Gift Acceptance Policies
- Recording Gifts for In-Kind Donations
- In-Kind Donations and Taxes
- Cultivation Strategies for In-Kind Donations
Donations made in kind are valuable tools for nonprofit organizations. They provide a new way of giving for supporters while nonprofits themselves are able to continue advancing their mission.
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What is an in-kind donation?
In-kind donations are non-monetary donations made to nonprofit organizations. These nontraditional donations include the transfer of any asset, usually goods or services, and can be contributed by individuals or other organizations and companies.
When your nonprofit receives monetary donations, you proceed to spend that funding to run your organization and your programming. For instance, your organization might include in your budget $10,000 to pay for lawyer services throughout the year. An in-kind donation from the lawyer, where they provide their services for free, would free up that $10,000 to be reallocated to other aspects of your organization.
As we’ve touched on, in-kind donations generally take two different forms:
- Goods. The donation of a car, as discussed in the introduction, is an example of a good that may be contributed to a nonprofit in kind. These assets are physical materials that nonprofits can use to enhance their strategy in some way.
- Services. Professional services can be given in kind to nonprofits that would otherwise need to pay for that same service. For instance, accounting services, lawyer services, graphic design, or web development can all be given in-kind by a generous professional.
Another type of in-kind donation to keep in mind is when an organization pays for a service on behalf of your organization. For example, an individual might decide to pay the legal expenses for your organization for an entire year, accepting the bill on your behalf.
Importance of In-Kind Donations
In-kind donations can be incredibly important for the advancement of your nonprofit strategy. Essentially, they take out the middleman when you need to purchase a good or service because it’s already contributed to you free of charge!
While your nonprofit likely appreciates any and all donations no matter the external circumstances of the world, in-kind donations are especially important and helpful for organizations during challenging economic times.
Take, for example, the most recent crisis on the top of everyone’s mind: COVID-19. The pandemic (especially in its early stages) caused an economic crisis that left many companies, nonprofits, and individuals in financial disarray. During this time, many individuals may have found it easier to give the assets they already had on hand rather than dig deeper into their increasingly spare pockets to contribute precious cash.
In-kind donations provide plenty of opportunities for nonprofits and donors alike:
- Donors can donate in-kind when it’s challenging to give money, providing more flexibility in donations.
- Donors know the immediate impact of their in-kind donation when they give it to a nonprofit.
- Nonprofits can immediately use in-kind donations without waiting for the delivery of goods or services to be approved.
- Nonprofits can reallocate funds for their most important needs when some necessary goods and services are provided in kind.
In-kind donations have the potential to be incredibly helpful for nonprofit organizations when monetary donations are scarce or limited as they provide additional financial allocation flexibility. However, not all in-kind donations are created equal; there are some dangers associated with accepting them.
Dangers of In-Kind Donations
In general, there is one inherent danger to accepting in-kind donations: you might receive some in-kind donations that you have no use for.
Imagine that there is an animal shelter nonprofit that accepts in-kind donations from its supporters. One supporter contributes their old puppy crates. A veterinary clinic in your area provides heavy discounts for vaccinations and examinations of rescue animals. Then, a third in-kind donation comes in: a supporter wants to donate their already-open dog food. While the first two donations are very useful for the organization, the last one is a health and safety violation for the organization.
The trouble with these donations is that they’re generally given out of the goodness of the supporters’ hearts, but they’re just not useful for your organization. You run the risk of two outcomes:
- Throwing away the donation made by the supporter, which is a waste for everyone.
- Declining the donation and appearing ungrateful.
Luckily, you’re not doomed to accept one of these two negative outcomes associated with in-kind giving. Your nonprofit can preemptively decide which donations are acceptable and most helpful for your organization, share those options with your supporters, and only accept those gifts that are most helpful without appearing ungrateful.
In-Kind Donation Gift Acceptance Policies
In-kind donation acceptance policies allow your organization to define which contributions will be most helpful for your mission and set those expectations with your supporters. The outcome is that you have grounds to refuse a gift that would not advance your mission, while still showing gratitude for the offer made by supporters.
Plus, gift acceptance policies can speed up an otherwise delayed process as your fundraisers or staff members try to determine what should be done with unusual contributions.
The other benefit of these policies is that you can actually encourage additional in-kind donations by setting one. Many supporters won’t realize the difference they can make by giving in-kind until you tell them what it is you need.
When the animal shelter from the last section explains that they need additional collars and leashes from their supporters, they’ll likely have a whole slew donated! If supporters don’t realize that’s a need, they may not think to donate them. Your gift acceptance policy isn’t just telling supporters what not to give, but it can provide some direction as to what they can do to make the greatest difference for your mission.
Often, the types of gifts that are considered “acceptable” from nonprofits include:
- Cash (check, credit/debit, ACH, cash, etc.)
- Professional services (graphic design, web development, bookkeeping, writing, marketing, event planning, etc.)
- Real estate and property
- Charitable trusts
- Intellectual property rights
- Life insurance and insurance beneficiary designations
To get started with your own gift acceptance policy, start looking at some of the ones adopted by other nonprofits. For instance, here are some examples of policies from well-known organizations:
- Habitat for Humanity Sample Gift Acceptance Policy
- Exceptional Children’s Gift Acceptance Policy
Keep in mind that your gift acceptance policy likely isn’t just for in-kind donations. It also outlines some of the legal obligations that accompany some types of gifts. By providing the guidelines, you can avoid certain contributions altogether or inform supporters of the stipulations that accompany specific types of gifts.
Recording In-Kind Donations
Why Record In-Kind Donations?
Reporting in-kind donations can be complex. However, it’s necessary to fulfill requirements for both donor tax deductions and to accurately file your nonprofit’s annual tax forms. Plus, recording your acceptance of in-kind donations is spelled out as an important part of the Generally Accepted Accounting Principles (GAAP).
Keep in mind that if your nonprofit is required to conduct an annual financial audit according to their bylaws, accountant, federal guidelines, or state guidelines, you’ll also need to have all of your in-kind donations recorded as a part of your financial reporting.
Finally, some states require nonprofits to record their in-kind donations, so be sure to check your state guidelines to see what your nonprofit requirements include.
How to Determine the Value of In-Kind Donations?
In-kind donations are valued at fair market value. FASB guidelines define fair value as the “price that would be received to sell the asset or paid to transfer the liability.” This means the value of in-kind donations is essentially the resale value at the time of the acquisition.
For some items, this is pretty easy to calculate. If a donor gives you a couch with the tags still on it, you can simply estimate the value of the couch based on its value when it was purchased (given some depreciation depending on the age). Physical items make it fairly simple to estimate the value, and if you don’t know, you can simply look it up online.
Other items, like lawyer services, may be more challenging to determine the value of. In general, for services, your organization should determine a fair value for the service provided per hour, then track the number of hours that service is provided to your organization.
Where to Record In-Kind Donations?
As soon as you receive your in-kind donations, estimate the value and immediately record the gifts. These should be initially recorded in your chart of accounts. From this centralized location, your nonprofit can pull further reports and related revenue information to draw conclusions from. These reports may include the statement of financial position, statement of cash flows, statement of functional expense, and other key accounting documents.
Create a separate revenue account as a part of your chart of accounts where you can record the in-kind gift. Then, make sure the credit and debit columns of the account net to zero.
If a lawyer donates $1,000 worth of services, your books would be listed as:
- Debit in kind revenue $1,000
- Credit in kind revenue $1,000
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These should net to zero because the contribution technically doesn’t impact the amount of money located in your nonprofit’s bank account. Your cash doesn’t change, but it does make the cash in your account more flexible as you don’t need to pay for the donated item or service.
In-Kind Donations and Taxes
There are two aspects to consider when discussing in-kind contributions and taxes: the tax forms your organization needs to submit on an annual basis and the taxes your supporters pay annually.
Are in-kind donations tax-deductible for the donor?
In-kind donations are tax-deductible for the donor. The IRS requires nonprofits to provide a written acknowledgment for their generous supporters to obtain a tax deduction in exchange for their in-kind donations.
When you acknowledge in-kind donations, you’ll generally need to include the following information:
- The name of your nonprofit and your EIN
- The date that you received the in-kind donation or that the service was performed
- A description of the donation or service contributed
- A statement declaring that the supporter didn’t receive anything in exchange for their gift
Unlike the acknowledgment provided for monetary donations, in-kind donations leave the donor responsible for providing the fair value of the contribution. By law, your organization actually can’t provide the value of the donation for the donor, although you can provide a good-faith estimate. This must be written very carefully to avoid noncompliance.
Your in-kind donation acknowledgment may look something like this:
Thank you for your generous contribution of [item description] that [organization name] received on [date]. This generous gift will help further the mission of our organization. No goods or services were provided to you in exchange for this donation.
There are a lot of different ways you can write your own donor acknowledgment letter. Double-check the IRS guidelines for your nonprofit before you send out your acknowledgments.
Do in-kind donations need to be recorded on your Form 990?
The short answer to this question is yes. Tangible in-kind donations are required to be recorded and reported on your Form 990. Keep in mind that in-kind donations valued at more than $25,000 or gifts that include art or historical artifacts require additional paperwork.
Intangible donations like services are not required to be reported on this form. However, you should still record these services to remain compliant with GAAP standards.
Keep in mind that the IRS may have specific guidelines depending on what it is that was given in kind to the nonprofit organization. For example, there are IRS rules specifically dictating rules that nonprofits must follow for vehicle donations worth over $500. Be sure to conduct thorough research for the rules, regulations, and reporting requirements set forth by the IRS when accepting in-kind donations.
Cultivating In-Kind Donations
Your nonprofit doesn’t need to rely on random acts of kindness to receive in-kind donations. Just like standard contributions, you can cultivate these contributions and tell supporters exactly what it is you need from them.
Sources for In-Kind Donations
There are two main sources from which you can receive in-kind donations: individual contributors and corporations or businesses. Both require slightly different cultivation and asking processes. Consider the following:
- Individuals: When individual donors come across troubling economic times but still want to find a way to give back, they’ll be likely to consider in-kind contributions. You may reach out to your supporters (especially those that have given in the past) during these times and ask for exactly what you need. You can also keep a list of potential in-kind contributions on your website so that supporters can always give in a variety of ways to support your organization.
- Corporations or businesses. Develop partnerships with a variety of companies and organizations and ask them to contribute in kind to your organization when you’re in need of specific items. For example, a food bank may partner with a local restaurant and ask for a donation of nonperishable foods that the restaurant has on hand.
Keep in mind that the line between individuals and businesses gets blurred sometimes when it comes to cultivating donations. For example, if one of your donors is a lawyer, they may be willing to provide legal services in-kind for your contribution outside of their firm. Or, if you recognize that many of your donors work for the same business, that may lay the groundwork for you to reach out for a new partnership.
How to Ask for In-Kind Donations
In-kind donations can be incredibly helpful for nonprofits, but even better when they’re of things you really need to advance your mission. Don’t be afraid to ask for the things that you need!
Here are a few options you can use to reach out for in-kind donations:
- Create a page on your website listing out the items you need. If you need recurring items at your organization, like lightly-used clothing, nonperishable foods, or furniture, try adding a permanent page to your website asking for such contributions. This is generally helpful for smaller-scale in-kind donations rather than large-scale gifts.
- Register for a wish list when starting new programs or activities. If you’re starting a new program or project and need specific items to get started, try asking for those as a registered wish list using a platform like Amazon. For example, if you’re furnishing a home for a family in need, you might decide to ask for kitchen supplies, a television, and furniture specifically for that home.
- Write specific letters asking for the in-kind donations you need. For larger gifts (like property or expensive services), write a one-on-one letter to your supporter who might have it available. Reach into your donor database to see who might be able to and interested in making these contributions, then write a specifically tailored letter to them just like you would a major monetary donation.
Dedicated donors want to help your nonprofit. They don’t want to give you a gift that you have no use for. So make it easy for them by telling them exactly what you need and specifically requesting those contributions.
Talk to a dedicated nonprofit accountant to make sure your in-kind donations are recorded properly.Contact Jitasa
How does the car from the introduction help little Timmy? Well, there are a number of ways. The nonprofit may offer food services for underprivileged children and need cars to deliver food. Or, they may fix up cars to regift them to entire families in need of a mode of transportation. Still, they may auction off the car and collect the money necessary to run other programs that will otherwise help Timmy’s condition.
In-kind donations can be incredibly helpful for nonprofits and provide a unique way that supporters can contribute to your cause.
If in-kind donations sound like something that can help your nonprofit, set up systems of accounting that will help you track and report on these donations accurately and in compliance with federal and state regulations. Then, be sure to ask for exactly what you need from your supporters.
The accounting process for in-kind donations is full of legal and financial requirements. To be sure you’re compliant with the rules and regulations, we recommend working with a nonprofit bookkeeper and accountant. Here at Jitasa, we can ensure your books are in order and your taxes are done correctly for every in-kind donation you receive.
If you want to learn more about accounting and fundraising regulations, check out these additional resources:
- Nonprofit Audits: A Complete Guide to Financial Auditing. When your nonprofit has a financial audit, your auditor will check that in-kind donations are recorded accurately. Check out other audit preparation necessities here.
- Form 990 Filing: Your Essential Guide to Nonprofit Taxes. Form 990s may seem confusing at first, but with proper guidance, you will be able to fly through tax season with ease. Read this guide for more information about how to file tax forms.
- Nonprofit Budgeting: Understand the Basics + Template. In-kind donations mean you will need to make adjustments to your annual budget, reallocating expenses. Read through this guide to better understand how to make the best use of your budget and to make these necessary adjustments.