Please note that the following article is not meant to be taken as tax or financial advice. Everyone's situation is different, and your tax advisor should ultimately be consulted before making decisions.
To encourage the support of social betterment programs and charitable organizations, the U.S. government incentivizes nonprofits, businesses, and individuals alike with unique tax benefits. For qualified 501(c)(3) organizations, this means income tax exemption. And for donors and companies that support these charities, deductions on federal income taxes are available!
However, actually calculating your tax deductions, especially for in-kind donations, can be a bit of a challenge. From reporting the market value of your contributions to differentiating what is and isn’t tax-deductible, there are multiple factors to take into consideration.
To lend a hand, we’ve compiled this simple guide to navigating tax deductions for in-kind donations. We’ll cover:
Maybe you feel a personal obligation to support nonprofits that champion missions close to your heart. Or, your in-kind giving may be more strategic—donating helps businesses positively market their brand and increase customer loyalty.
Whatever your reason and whoever you may be, these insights can enable you to make the most of your in-kind contributions and save revenue. Let’s dive in.
Charitable Gifts: In-Kind vs Monetary Donations
Tax-deductible donations are typically gifts contributed to organizations that, in the U.S., the IRS recognizes as “exempt organizations.” These contributions can take a variety of forms, from money to products and services.
All of these methods of charitable giving are potentially eligible for tax deductions, but they must meet certain criteria. For example, your donations:
Cannot be made out to political organizations, candidates, or campaigns
Cannot be made in return for benefits, such as event access, that exceed the fair market value of your contributions
Must be made out to officially registered or recognized tax-exempt organizations
Contributions to registered 501(c)(3) organizations are potentially tax- deductible, based on your filing entity’s tax situation, but they aren’t the only organizations that qualify. If you’re unsure whether an organization has 501(c)(3) status, you can always take a look at the Tax Exempt Organization Search from the IRS.
After your donations meet these basic requirements, you can begin considering how to calculate and report them for tax purposes. This is where monetary and in-kind contributions start to differ.
Reporting Monetary Donations for Tax Deductions
For cash, checks, and other monetary donations, the process is more straightforward. This is because your cash gifts already have an explicit value. A dollar is a dollar.
However, from one-time cash donations to donated products to matched employee gifts, you should keep track of all charitable contributions throughout the year.
Maintain organized receipts of your donations, such as bank records or written acknowledgments from the nonprofits that receive your donations. When the time comes for reporting, the forms that you fill out will depend on whether or not you are filing as a business, and how your business is structured. For example:
Individuals and sole proprietors attach donation receipts to Form 1040, Schedule A; Individuals are subject to a $300 per-person limit before they must itemize deductions while proprietors itemize deductions immediately
Partnerships, S Corporations, and pass-through entities attach receipts to personal returns (Form 1040, Schedule A), with deductions processed as business losses
C Corporations attach receipts to Form 1040, Schedule C, deducting donations from federal income tax returns
For more information on how you or your business would report charitable contributions, check Tax Topic No. 506 from the IRS.
Reporting In-Kind Donations for Tax Deductions
For in-kind contributions, companies typically can choose to write off products provided to charitable events or programs as either a marketing expense or charitable donation, whichever is easier or more advantageous. For example, classifying items as donations can help when wishing to communicate higher charitable giving totals.
There are a few more things to consider about in-kind donations in tax reporting. Namely, you need to determine the fair market value (FMV) of your donations. This is a calculation of the amount of money that a donated good—like a raffle fundraising basket full of your products or pallets of products—would reasonably be worth.
After all, you can’t very well declare “auctioned vacation experience” on your tax returns. The donor is responsible for determining and giving the IRS a tangible, calculable value to factor into your tax deductions. For physical products, retail value could work. For services like spa treatments, the amount eligible to be written off may be different and closer to what providing the service actually costs the business, since personal time cannot be deducted, but employee wages can. To learn more about fair market value and how to determine the FMV of your in-kind gifts, reference IRS Publication 561.
Additionally, if total tax deductions exceed $500, Form 8283 (for non-cash charitable contributions) is required in addition to Form 1040. Take a look at the section “How do I report my in-kind donations for tax purposes?” for more information about completing IRS Form 8283.
That being said, there are some exceptions to these standards! For example, special rules apply to select types of charitable donations, like inventory and similar items, pre-valued.
But don’t be discouraged! There are hundreds of IRS resources that delve into the finer details of charitable donation reporting to help you make the most of in-kind donations.
Furthermore, if you’re a business professional managing a robust in-kind giving program, investing in a dedicated in-kind giving platform can streamline the entire vetting and reporting process through intuitive data tracking and record-keeping.
FAQs: The Deductibility of In-Kind Donations
If you’re still buzzing with questions about the tax deduction potential of in-kind donations, you’re not alone! Tax deduction reporting is a complex process with unique standards, rates, and rules to consider. Let’s tackle a few of the most frequently asked questions regarding tax deduction and charitable donations.
Can businesses deduct charitable contributions?
The simple answer is yes, businesses can absolutely deduct charitable contributions (both monetary and in-kind) from their taxes. While you will not receive a deduction for the donation of services, physical products and costs associated with donated experiences are eligible for deduction.
How much can you deduct for charitable contributions?
The answer depends on several factors such as how you are filing, other deductions, and what kinds of donations are being reported. At the time of this article’s publishing, in-kind donations have a deduction ceiling of about 50% to 60% of gross adjusted income (AGI) for some businesses and most individuals.
Up to 100% of monetary donations can be potentially deducted, but actual allowances still depend on the classification of organizations you donate to and other factors on your own tax returns.
Take a look at the different kinds of deduction ceilings depending on how you file your taxes and to whom you donate:
A 30% deduction ceiling is imposed for donations to certain veterans groups, cemeteries, fraternities, and private foundations
If you receive something in return for your donation, like event access, you can only deduct the leftover fair market value after subtracting the value of what was received
C corporations have a deduction ceiling between 10% to 25%, which they must affirmatively elect for each contribution
For more information on your specific access to in-kind tax deductibility, consult the IRS website and your own financial/tax advisor.
What in-kind donations are not tax-deductible?
If you want your in-kind gifts to qualify for tax deductions, you’ll have to do a bit of research in advance. For one thing, time and services do not typically qualify for a deduction. However, you can deduct additional expenses incurred during your hours of service—a great reason for businesses to promote employee volunteering!
Additionally, you’ll want to pay very close attention to the organizations you’re donating to. Once again, the following kinds of gifts are not eligible for tax deductions:
Political gifts
Donation amounts that are exceeded by the FMV of benefits you receive in return
Donations to organizations that the IRS does not recognize as exempt
This is one of the reasons it’s so important to partner with the right nonprofit organizations!
To ensure that your business is sending its valuable in-kind contributions to qualified nonprofits, consider investing in DonationMatch’s turnkey donation matchmaking software. Our intuitive corporate giving platform allows you to be strategic about giving to nonprofits that are vetted and have upcoming event opportunities, maximizing your chances for fit with your goals and tax deductibility.
How do I report my in-kind donations for tax purposes?
As we mentioned, you will first determine the FMV of your donations. Remember, FMV describes the appraised cost of a non-cash charitable contribution.
Once you’ve determined the value of your in-kind donations and collected the proper donation receipts, you will complete the appropriate form(s) to report it.
In addition to Form 1040 (Schedule A for individuals, sole proprietors, and pass-through entities; Schedule C for most other businesses), you will be asked to fill out Form 8283. Fill out Section A if your tax-deductible value is between $500 to $5,000. For deductible values of single items exceeding $5,000, complete Section B and perform an official appraisal. For deductible values exceeding $500,000, fill out Section B and attach the appraisal to the tax form.
3 Tips to Save Money on Your In-Kind Donation Tax Reporting
Now that you’ve considered when, how, and under what circumstances your in-kind donations are eligible for tax deductions, it’s time to top off your understanding with a few best practices. Follow these essential in-kind donation tax tips to begin tackling the in-kind donation deduction process like an expert.
1. Record and document your contributions.
It’s impossible to stress this point enough—keeping organized records of your contributions is one of the first and most important steps to successfully securing tax deductions.
While there are hundreds of resources to guide you through the tax reporting and form-filling process, none of them can do you much good if you’ve lost the details and proof of your charitable giving.
Be sure to practice good data hygiene with your personal or organizational records—remove outdated or unhelpful information, utilize effective database software, and perform data audits when necessary.
2. VeT Organizations for fit and compliance.
While you can technically donate to organizations, people, or causes that are not IRS-recognized 501(c)(3)’s, your potential ceiling for tax deductions may be significantly lower.
Furthermore, if you are a business owner, other advantages of corporate social responsibility—such as positive impressions, cause marketing, and increased customer loyalty— work best when you partner with qualified, well-respected nonprofits.
To maximize the benefits of in-kind giving for your business (and your nonprofit partners!), take the time to verify the validity of your potential donation recipients’ 501(3)(c) status and the person reaching out to you to ensure they are legitimately connected with the organization. DonationMatch’s built-in vetting finds 10-20% of donation solicitations to be questionable or unauthorized, most commonly due to contacts soliciting donations without permission or lack of IRS-recognized exempt status.
3. Leverage dedicated software to manage in-kind donations.
From automating communications to simplifying data tracking, the right in-kind donation software can completely transform how you manage your in-kind giving processes.
While individual people can get by with a simple spreadsheet of their occasional charitable giving, your business and its more robust, complex giving programs would greatly benefit from specialized software.
In-kind giving platforms like DonationMatch are built to easily facilitate, record, and manage the in-kind giving process for companies that distribute thousands of donations a year. This means that everything from vetting and picking out the targeted nonprofit recipients of donations to printing out detailed reports of your contributions is made possible with just a few clicks.
Wrapping Up
Reporting tax deductions is an essential tax duty for countless businesses, yet it’s something surprisingly few people have a firm grasp of—and it’s no wonder why. Tax deduction reporting, and specifically reporting for charitable contributions, is a delicate process that takes careful attention.
However, with the help of these insights and best practices, you should be far better equipped to tackle your in-kind donation programs, assess their tax deductibility, and make the most of your charitable giving!
Interested in learning more about in-kind donations, in-kind giving software, and tax filing best practices? Check out these additional resources:
In-Kind Donations: Everything Your Organization Should Know. Beyond a tax deduction, there are far more ways that in-kind donations can benefit your organization. Dive into the fundamentals of in-kind giving, from business benefits to essential tools.
6 Nonprofit Tax Tips for Reporting In-Kind Donations. Learn more about the nonprofit side of the tax process with these expert tips for in-kind donation tax reporting.
Corporate Giving Platform | Give Smarter with DonationMatch. Invest in corporate giving software that can not only help you organize your in-kind donation program, but completely optimize it. Give smarter with DonationMatch.
