In-Kind Donations: Are You Handling Them Correctly?

For many nonprofit organizations, in-kind donations are a vital source of support. Whether it’s donated goods, services, or facilities, these contributions can help nonprofits stretch their budgets and further their missions. However, properly recording, valuing, and reporting in-kind donations is critical to ensure compliance and transparency.

What Qualifies as an In-Kind Donation?

An in-kind donation is a noncash gift that provides value to a nonprofit. These donations typically fall into three categories:

• Goods: Items like office supplies, clothing, food, equipment, and auction items.
• Services: Professional services such as legal work, graphic design, or consulting that the provider would typically charge for.
• Use of Facilities or Equipment: Free or discounted use of office space, event venues, or specialized equipment.

How to Properly Record and Recognize In-Kind Donations

1. Determine Fair Market Value: The nonprofit should determine the reasonable value of the donated goods or services. For tangible items, this can be based on retail price, appraisal, or similar listings. For professional services, the fair value is what the donor would normally charge for the service.
2. Acknowledge the Donation Correctly: Nonprofits should provide donors with an acknowledgment letter that describes (but does not assign value to) the donated item or service. For example: “Thank you for your generous donation of office furniture, including desks and chairs. Your support helps us continue serving our community.” The donor is responsible for determining and reporting the value for tax purposes.
3. Follow Accounting and Reporting Standards: Under Generally Accepted Accounting Principles (GAAP), nonprofits must record in-kind donations in their financial statements that meet specific reporting requirements.  Goods should be recorded as revenue and an equivalent expense or fixed asset if the nonprofit uses it for its operations or sells the item.  Services that require a specialized skill and would otherwise need to be paid for, should be recorded.  For example, donated legal or advertising services are considered having a specialized skill while donated time to answer phones or cleaning does not require a specialized skill.
4. Track Non-GAAP Donations:  Some types of donated goods and services do not meet GAAP requirements for recording; however, the nonprofit should still track these gifts (outside of their accounting).  These goods and services still provide value to the organization and show the community’s support for its programs and operations.

Common Mistakes to Avoid

• Failing to Record Donations Properly: Some organizations fail to record donated goods and services, leading to underreported revenue.
• Overvaluing or Undervaluing Gifts: Assigning incorrect values can misrepresent financial statements.
• Not Acknowledging Donors Adequately: Failing to send proper donor acknowledgments can impact donor relations and compliance.

Properly handling in-kind donations is crucial for financial transparency, compliance, and donor trust. By following best practices in valuation, acknowledgment, and reporting, nonprofits can maximize the impact of these contributions while maintaining strong financial health.