Aaron Sullivan
Your client's nonprofit organization is required to record and report not only cash donations but in-kind contributions, too. Sound like a lot? That’s because it is!
In-kind gifts make up a majority of donations to nonprofits, and these charitable contributions no doubt keep a nonprofit functioning. That’s why they’re always welcome!
But recording them? That’s a different story.
Recording in-kind donations for nonprofits is a mundane but crucial task that comes with its share of challenges—especially if you’re not aware of the rules. To top it off, each type of in-kind gift comes with its own set of reporting best practices.
Not sure where to start? We’ve compiled a helpful guide for in-kind contribution accounting.
In-Kind Donations for Nonprofits 101
There are a ton of financial challenges for nonprofit organizations. To help supplement the cash resources of nonprofits, many in-kind or non-cash donations are made by individuals and organizations.
Let’s back up just a bit and explain exactly what an in-kind donation is. An in-kind donation is a non-cash gift to a nonprofit. If you listen to NPR, you’re definitely familiar with an in-kind donation, as they routinely suggest making an in-kind donation of your used car as a way to help them stay afloat.
So, in-kind donations come in many forms and include contributions of goods, services, and time.
In-kind donations for nonprofits include goods and services that can be used to support their cause. This important rule can help determine whether to recognize specific non-cash donations. But more on that later.
Types of In-Kind Accounts
In-kind services include those that would help a nonprofit directly or indirectly support its mission. These include all services donated by individuals, small or large businesses, corporations, institutions, and organizations. Some examples of in-kind services are branding, publishing, accounting, legal, teaching, babysitting, and catering.
Is a nonprofit required to record all in-kind services? No. Only services that fulfill the criteria established by the Generally Accepted Accounting Principles (GAAP) need to be recorded. But when in doubt about what you should or shouldn’t keep track of, air on the side of caution: keep track of it!
Imagine a nonprofit having to spend the majority of its working capital or cash donations on office rent or vehicles. That would amount to significant expenses.
Financial assets like securities and stocks are also a part of in-kind donations for nonprofits. But for these to be accounted as contributions, they must be assets of value to the nonprofit, or assets that can be resold in exchange for money.
What about items that are donated to nonprofits only to be resold? What items are included in this category?
For example, a nonprofit might receive tickets to a concert or sporting event, which can be resold. As an example, these may include assets like boats and cars that can be resold at a charity auction to make money.
Donations received at special events like fundraisers come under this category. For special events, nonprofits would also require a separate item under the expenses category to offset the expenditures required for arranging and conducting these.
To evaluate the impact of special events, it makes sense to categorize in-kind donations received at special events separately from those received elsewhere.
Why You Should Record In-Kind Donations for Nonprofits
Does your nonprofit prepare financial statements using GAAP? If so, it must also record and report in-kind contributions in compliance with GAAP accounting standards. Some state laws also require in-kind donations for nonprofits to be reported according to GAAP.
If an organization is audited by an independent accountant, it may have to do the same. At times, lenders and grantors may also require nonprofits to do so.
Form 990 requires in-kind goods to be reported but not in-kind donations. For quick reporting ease, it makes sense to classify in-kind donations into the categories mentioned above.
Most importantly, recording and reporting in-kind donations for nonprofits helps organizations understand its impact on the program. And remember—if in-kind donations constitute a majority of a nonprofit’s programs, then not recognizing them will result in under-reporting true impact. You don’t want that!
Here are a couple of examples why: food banks that routinely receive food supplies must report them to avoid under-reporting their impact. Similarly, shelters that receive clothes, food, and other supplies must recognize these in order to understand their true value.
Which In-Kind Donations for Nonprofits Should Be Recognized?
In-Kind Services: What to Recognize
GAAP requires the fair value of donated services to be reported. But there are conditions that donated services need to fulfill to be recognized.
For starters, all donated services that create a non-financial asset or improve or augment it are to be recognized.
Similarly, all donated services that are provided by entities should be recognized. Services that would have been purchased had they not been donated should be recognized, too.
Those services that do not meet any of the above conditions will be recognized only if these are fulfilled by an affiliated organization. Even specialized services performed by board members will not be reported unless they would have been purchased had they not been donated.
In-Kind Gifts: What to Recognize
For in-kind gifts to be recognized, they must be valuable for the nonprofit. These gifts should be reported only if they have been donated unconditionally and without receiving anything in return.
In-Kind Services: How to Determine Value and Record
In the case of in-kind services, the fair value is estimated by determining the hourly rate for the service and then multiplying it by the number of donated hours.
For instance, if the hourly rate for accountants is $75 and they have donated 20 hours of service, then the estimated fair value of the donated accounting services is $1,500, which would be recognized as contribution revenue.
In-Kind Gifts: How to Determine Value and Record
The value of in-kind gifts should be estimated at fair market value as shown on the date of receipt. The value is then recognized as contribution revenue, and the other side of the entry could be an asset or expense (depending upon the service) in the period that the gift is received.
When an unconditional promise is made to donate non-cash items, it’s essential to record it as contribution revenue in the period that the promise is made. This principle is to be followed even if the items haven’t been received at the time the promise is made.
Upon receipt of items in the future, the fair value should be recognized as an asset in the period of the contribution and an expense in the period of the benefit.
In the case of tangible assets, the fair value is typically calculated by the price that would have to be paid in the market.
Disclosures to be Included in Financial Statements
In the case of donated services, nonprofit organizations should disclose the programs or activities for which in-kind services are used. The nature, extent, and amount recognized as revenue in the period should also be disclosed in the statements.
We recommend that nonprofits disclose services that are received in kind, even if they aren’t able to be recognized as a contribution. For example, if volunteer hours are spent caring for the elderly at a hospice location and were not recognized as revenue, these can be disclosed in the statements.
Which In-Kind Donations for Nonprofits Should Be Reported in Form 990?
Tangible in-kind gifts are required to be reported in Form 990. Property gifts should be reported as grants, contributions, or membership fees. In the case of contributions that exceed $25,000, nonprofits are required to submit extra paperwork. Similarly, if the non-cash donations include art or historical artifacts, extra paperwork is required.
In-kind services don’t need to be reported in Form 990, but their value should be shown as reconciling items.
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