Guest post by Mathew Tooker at File990
If you’re looking for charity fundraising strategies with substantial untapped potential, consider in-kind donations. An in-kind donation is characterized as any non-monetary gift provided to a nonprofit organization. These types of gifts offer significant benefits to nonprofits, yet they’re often overlooked when it comes to soliciting donations, creating detailed fundraising plans, and mastering nonprofit finances.
Picture this: you run a nonprofit animal shelter in your community and a local business owner tells you they want to donate pet food and a gift certificate to their store to your organization’s upcoming fundraising event. That’s great! But now you have some questions: Can they write off their donation as a tax deductible? How do you record the gift in your accounting and bookkeeping systems? Must you report the in-kind contribution in your annual Form 990?
Determining how in-kind donations play into your overall nonprofit taxes can be a challenge—which is why we created this guide. In order to keep your organization above board, it’s important that you consider the following in-kind donation tax tips:
Understand what is considered an in-kind donation.
Determine whether you’re required to acknowledge in-kind gifts.
Keep up with new regulations.
Calculate the donation’s fair market value.
Track and record in-kind donations throughout the year.
E-file your Form 990 with an IRS-authorized e-filer.
Are you ready to take a crash course on ensuring accurate nonprofit finances when it comes to in-kind donations, and uncover how to record these gifts in your nonprofit tax returns? Let’s get started.
1. Understand what is considered an in-kind donation.
It’s nearly impossible to report your in-kind gifts accurately if you’re unsure of what is actually considered an in-kind donation. The basic definition of in-kind gifts can even be a bit misleading (i.e. donations of time, goods, or services instead of money). That’s because, unfortunately, not all donations of time, or volunteerism, count as in-kind contributions.
For example, general volunteer hours (such as setting up for an event or checking in guests) do not count as in-kind gifts, while individuals volunteering more specialized services (such as accounting, marketing, or catering) do.
On the other hand, product donations and other goods might include auction baskets, event swag, tickets to a theme park or play, clothing, food, supplies, equipment, and more. Gifts of goods like these are also considered in-kind donations, and should be reported as such.
Finally, in-kind donations can also be intangible goods as well as items loaned to nonprofits. In this case, gifts like free or discounted advertising space, gift certificates redeemable for services, or use of an event venue may be considered in-kind gifts.
2. Determine whether you’re required to acknowledge in-kind gifts.
One of the first steps in understanding how to record and communicate your in-kind gifts is determining whether you have to acknowledge and provide donor tax receipts for these types of gifts. Whether you’re required to report in-kind donations can depend on a number of factors, including:
The state from which your organization is based
If you are subject to an external audit
Requirements from lenders, grantors, or other key stakeholders
The value of the in-kind donation in question
According to GAAP guidelines, the IRS requires tax receipts be provided for gifts of $250 or more. When it comes to in-kind donations, you don't have to value the gift yourself; just provide the receipt with the description of the donation and other basic information.
Even if you determine that your organization is not required to acknowledge these types of non-monetary donations, it’s a good idea to do so anyway. Effectively communicating your appreciation to donors allows them to better understand their impact and increase the likelihood of them giving time and time again.
This also means you’ll have detailed records of all in-kind donations for streamlined and improved ongoing financial management.
3. Keep up with new regulations.
Nonprofit fundraising and tax reporting each come with their own unique set of compliance requirements that can be difficult to keep track of. And unfortunately, these regulations are constantly changing as well to provide increased levels of transparency and accountability for charitable organizations to their stakeholders.
For example, the Taxpayer First Act signed into law in 2019 requires nonprofits to file their tax returns online rather than send a paper copy in the mail. While many organizations have already begun e-filing their taxes, most were not required to file electronically until December 15, 2020. Since then, there has been a transition period ending on July 1, 2021, effectively requiring all Form 990s (including Form 990-N and Form 990 EZ) to be filed electronically going forward.
On the other hand, regulations pertaining to gifts in-kind in particular are changing as well, including with new legislations across a number of states. For example, new rules in key states like California require nonprofit organizations to report in-kind donations where they were previously not required to do so.
That being said, it's a good idea to keep up with new and relevant tax regulations to ensure your organization continues to stay above board. Just because you are not required to record your gifts in-kind one year does not mean you'll be free from the same requirement the following year as well. Stay up to date with nonprofit news or consult a financial expert to determine how your organization will be affected by changing guidelines.
4. Calculate the donation’s fair market value.
Now you’ve determined whether you’ll need to report your organization’s in-kind donations in your yearly tax returns. But how? It’s not so cut and dry as with monetary donations that come with the financial value attached.
According to the FASB, or the Financial Accounting Standards Board, you must start by determining the donation’s fair market value (or FMV). This is defined as, “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” In other words, it’s what the donation is worth in dollars.
Sometimes this is simple to calculate. For example, a brand new computer donated by a local tech retailer is worth the amount that would have been listed on its price tag should you have purchased it yourself. Additionally, a lawyer’s time donated to your organization would be worth their hourly wage multiplied by the amount of hours volunteered.
Determining a donation’s FMV is important for more than just your nonprofit tax return, too. In fact, this detail can be critical for choosing an opening bid for an auction item, creating individual tax receipts for donors, and maintaining detailed and accurate records of your finances. Do your research when receiving gifts in-kind, explore how other organizations credit similar items, and consider what value the donations offer your organization.
5. Track and record in-kind donations throughout the year.
One best practice to keep in mind leading up to tax season is to maintain detailed and accurate reports of donations throughout the year. This goes for both monetary gifts and for in-kind donations as well. This way, you won't have to worry about scrambling at the last minute to get your records in order prior to your Form 990 deadline.
After all, you’ll want to get started on your nonprofit tax return as early as possible. And having the information you need readily available can make a big difference—especially when it comes to choosing the right tax form! Most organizations determine the version they file based on gross annual receipts. Because your in-kind gifts count towards your total gross receipts, they can play a significant role in ensuring your tax returns are filed completely and precisely.
In fact, this File990 resource on the 990-N vs. 990 EZ takes a closer look at the differences between the two abridged versions of a nonprofit tax return and how to determine which form you need.
6. E-file your Form 990 with an IRS-authorized e-filer.
As previously mentioned, organizations are now required to file their tax returns online. Not only is this a new regulation put in place by the IRS to streamline the entire tax process as a whole, it also makes preparing and filing your annual Form 990 simpler than ever before. Plus, you can work with an authorized e-filing service for additional assistance!
When choosing your service, be sure to consult this list of approved Modernized e-File (or MeF) Providers from the IRS. This way, you know your organization’s financial information is in the right hands.
Re:Charity’s guide to Form 990 software also explores a few suggested solutions as well as an overview of why the right software is important. Whether your organization is e-filing for the first time, reporting a substantial amount of in-kind donations, or are affected by the constantly changing financial regulations, a certified tax expert can make a big difference and guide your nonprofit team through the process.
All in all, effectively recording, tracking, and reporting in-kind gifts to your organization doesn’t have to be difficult for your nonprofit.
When you understand the nuances of these non-traditional donations and have the tools you need to record and track them, as well as ultimately submit your organization’s annual tax return, you’ll set your nonprofit up for better organized finances and overall success. Good luck!
About the Author:
Mathew Tooker is an expert in sales forecasting, analytics, goal-setting, client growth, and business development. With experience serving the Greek life community, nonprofits, and other member-based associations, Mathew is dedicated to providing tremendous value to his clients.
When he’s not moving organizations forward, you can find him on the golf course, spending time with his two dogs, Reagan and Teddy, running marathons, and watching the Atlanta Braves. He’s also a graduate of Auburn University and a part-time MBA student at Florida State University.