What Are In-Kind Contributions?
Gift-giving is always a kind gesture, and it becomes even more frequent during the holiday season. Nonprofits often receive many donations from kind individuals who support the organization's vision. The IRS requires organizations to report these contributions, but not all gifts are monetary.
This aspect of tax reporting can initially prove confusing for nonprofits, but learning some information on the workings of non-cash gifts will help.
These unique gifts are in-kind contributions, and here you'll learn how they work — plus how you can report them.
What Are In-Kind Contributions?
An in-kind contribution is any non-monetary donation, such as a service or a good. If someone lends their digital marketing skills to your nonprofit free of charge, this is an in-kind contribution. Someone gifting your organization with an art piece or a bundle of computer hardware is also contributing in-kind. These donations often have monetary values you can assess and record on your tax forms — though not all types can be priced.
If a contractor paints the inside of your building, you calculate their work's monetary value based on their hourly rate. Similarly, a donated good is reported by how much it would cost your organization to buy it without the contribution.
Some businesses may even lend employees to help a nonprofit complete their mission. In this case, you'd determine the value by calculating the cost of the skill level needed for the service.
How to Report Them
Contributions have to be reported if they enhance non-financial assets or offer a specialized skill — such as legal services. Donors must receive written acknowledgment for any good or service over $250 before claiming it as a deduction.
Your organization can give donors recognition through a receipt, preferably by letter. Emails are standard in the technology age, but donors may consider them too informal. The receipt will outline any goods or services you provided in return for the contribution.
Record your in-kind contributions at fair market value according to the receipt date. Tangible donations, like furniture or office supplies, go on your Form 990 and Schedules A, B and M. Schedule B gives instructions for reporting marketable securities. Schedule M requires you to report the methods you use for assessing the contribution's financial value.
In addition to receipts, fundraising events are excellent ways to celebrate current donors and open the door for new ones. These events also boost your nonprofit's reputation, which encourages more people to support your efforts. When thanking donors through written acknowledgment, the statement should include a description of the donation. Avoid including the contribution's value in the correspondence.
How to Accept Them
Create a gift acceptance policy for your organization. Some in-kind contributions don't align with an organization's mission, and others require more upkeep than what's feasible. Establishing guidelines for the type of in-kind donations your organization can accept will save you and your donors a lot of trouble. The Schedule M tax form also asks if your organization has a gift acceptance policy, which presents even more reason to create one.
Specify what kinds of donations aren't acceptable — including anything over a certain price threshold. Encourage donors to seek legal advice if they're unsure about giving an in-kind contribution. Some gifts — like real estate — will require your organization to seek legal counsel before accepting them. If there are specific donations you can't dispose of safely, let donors know not to contribute these.
A gift acceptance committee can handle any discrepancies that occur with the policy versus received donations. Creating a screening group can be especially helpful for large nonprofits that often receive non-monetary contributions. With so many items flowing in, it's essential to track which ones you can realistically accept.
Managing In-Kind Donations for Your Nonprofit
By understanding what in-kind contributions are and how they work, your organization can ace tax reporting. Consult with a legal professional for information on how your nonprofit should handle these donations. It's essential to follow IRS guidelines to avoid fees.