Introduction to In-Kind Donations: When and how to record noncash donations to your Nonprofit

In this short episode, we'll introduce the basics of when, what, and how to record in-kind donations to your nonprofit organization.

Transcript

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Welcome to Navigating Nine Pockets with Lightboard Accounting. My name is Amity, and I'll be your captain today as we discuss heart topics around accounting for non-profits. Lightboard accounting is an accounting that works exclusively non-profits too. We cover everything from accounting to 990 rands or development and stock training. When I speak at conference to spoke to voice suggests to me that I made it my own podcast to tell my stories and share my experience. So I'm excited to dive right in and to get to some of my favorite topics and share some special guests with you. Today we're going to talk about in-kind donations. When do we record it? What counts, and how to account for it in your financial system. So nonprofits should record in-kind donations, which are also known as non-cash gifts of goods, services, assets, in their actual accounting system so that it accurately reflects true operational costs and revenue. Some organizations they may only get donations of items for like auctions, and others might receive a lot of donated goods, especially like medical clinics where there's professionals that are donating their time. So all of these transactions have to be recorded at something that's called fair market value, which is what you would have paid for to either purchase them or rent them. So let's talk about donated goods first. So donated goods are things like office supplies, computers, food and beverages for events, medical supplies, furniture, auction donations, food. If you're a thrift store, specific items that were donated, and they're all kind of accounted for in different ways. Like, for example, for food banks, a lot of the times they'll record donated food by the pound. And thrift stores will assign a specific dollar amount for a t-shirt versus a pair of pants. Other items like office supplies and like computers and physical equipment items, it's very easy to look up the value. And then there's other things like specialized professional services. Now, I do want to clean up one misnomer in the sense that all volunteer time is recorded in the general ledger. And that unfortunately is not the case. Don't shoot the messenger. But unfortunately, it's very specific professional services that you would account for as an in-kind donation. And so again, general volunteer labor, like folks volunteering for an event or staffing the animal kernels, or just volunteering their time in the office, unfortunately does not actually count as an as an in-kind donation that you would recognize in your financial system. You should still track the hours because that's really incredible donor information, especially for grants and reporting out to the community. However, professional services must be recorded if they meet a couple criteria. So the first one is that the service is a specialized skill. For example, legal counsel or attorneys, lawyers, IT support, accountants, and then marketing and medical care are other examples. And these would be things that you would have to purchase these services if they hadn't been donated. And when you record it, you record it at the fair market value again, what their billable rate would most likely be in the general market. And then for facilities and equipment, say someone donates rented office space, warehouse space, airtime for advertising. Those types of items do get recorded. Discounted use for if someone donates a vehicle, if someone pays for your utilities. Again, those are the types of items that would generally be recorded as in-kind expenses. Or if someone directly pays your bills directly to a third party as well. All of this stuff is recorded in your books, and a lot of organizations have two choices on how they record it. So you can record it as in-kind revenue and in-kind expense. So essentially it kind of washes out, but it's still recorded on your books. The in-kind revenue would be the fair market value, and the in-kind expense would be the same, generally the same dollar amount, because that's what it would have cost for you to purchase it. So the contribution is recorded and then the offsetting expense. So for most organizations, it comes in and comes out in nets to zero, but it is part of generally accepted accounting principles to record in-kind donations and the offsetting expense. If you want to read more, super exciting reading. It's the FASP standards, F-A-S-B, on recording in-kind donations. And I will note that there is a little bit of a discrepancy between the 990 and then what's recorded in the financial statements. For example, one of the big ones is rental of space. That is not included. It's actually backed out on your 990. So what is fair market value? Fair market value is what you would have paid in the general market for either those services or those items. So folks are always asking me, well, how do I account for this? You could look up, you know, on Craigslist and on EBA what things are selling for. If someone donates a bicycle, you can look up what the value is. And just document and keep good books and records of good faith effort to document that fair market value. For donated services, most folks will give you a value of their services. So if it's an attorney, maybe they charge $250 or $300 an hour. That's the dollar value that you would record. The value that is recorded on the books of the nonprofit doesn't necessarily have to tie and agree to what the donor is going to take. For many cases, especially donated services or donated art, they can only deduct their actual expenses, not actually what they would charge. So it's a little bit different. And one of the things that I commonly get asked is what is supposed to be on the acknowledgement letter. And our recommendation, and it's the IRS's standard, is that you provide an acknowledgement letter saying, thank you for your donation of 100 bagels for our event. You don't technically have to put a value on the books per se, or not on the books, but on the acknowledgement letter. But you do have to acknowledge the donation. And the thing is, is that only items valued over $250 must receive a written acknowledgement for IRS purposes. But you know, it's just good practice to donate and write thank you letters for all donations that go or come from specific donors. So hopefully this is helpful. If you're an accounting nerd, what would happen is you would credit the in-kind donation revenue and you would debit the in-kind donation expense. Now, some organizations choose the put instead of in-kind donation expense, they put the expense directly in what category the expense would have occurred so that when they're preparing the budget, they could also budget that for next year if they don't get those donated items. So if it's office supplies, you would credit in-kind donation revenue and debit office supplies. So there's kind of two different ways and two different methodologies that folks record in-kind donations. Either one works. Some folks like to see the value in one big category, and others spread it where the natural classification would happen. So hopefully this is a helpful introduction to in kind donations. And uh let us know if you have any questions.