Nonprofit Income Accounts Part 3: In-Kind Donations
In the last few posts we have been talking about contribution income and the kinds of income accounts you need. Our Chart of Accounts Grand Tour travels through in-kind donation income accounts today.
In-kind donations are one of the more confusing and difficult areas for nonprofits. And that’s unfortunate because in-kind donations are so common. Frequently organizations fail to record in-kind donations altogether because they don’t know the rules or why it’s important.
Why Record In-kind Contributions
- It’s required for in-kind contributions that meet certain definitions established by Generally Accepted Accounting Principles (GAAP)
- In-kind goods are also supposed to be reported in Form 990
- For management purposes, it’s good to know what you would have to pay if you did not receive the in-kind donations. More than one nonprofit has been surprised when a prior source of in-kind donations, such as a donated office space, suddenly stopped.
- You don’t want to shortchange reporting the impact of your programs.
Of course not all in-kind donations pertain to programs, but many do. You want your program service expenses to be fully reflected on your profit and loss report. If in-kind donations are a big part of your program services and you leave them out, you are under reporting your impact!
One organization that provides activities for children with serious illnesses had some interesting in-kind gifts listed in their recent audited financial statements, including over $27 million of donated theme park tickets and services. That’s about 60% of their program service expenses.
A major food bank reports in-kind gifts, mostly food, that make up approximately 89% of program service expenses.
The level of your organization’s in-kind donations may not be that dramatic, but you still want to include them.
What accounts do you need in your chart of accounts for in-kind donations? The accounts follow the major types in in-kind donations.
- In-kind Goods
- In-kind Services (GAAP)
- In-kind Services (Non-GAAP)
- In-kind Rents
- Donated Securities
- Donated Item Sale Proceeds
- In-kind Special Events Donations
Let’s talk briefly about each one.
In-kind goods can be any tangible in-kind gifts. Nonprofits often receive donated supplies such as diapers and formula, used clothing, pharmaceuticals, food, and other supplies. In-kind goods are valued at fair market value on the date of donation. We’ll do a separate post on how to determine fair market value!
In-kind goods can also be fixed assets, such as a car or boat. Keep in mind the IRS has some paperwork for you if you receive an asset like this.
In-kind Services (GAAP)
The value of in-kind services is included in your financial statements if they meet the criteria defined in Generally Accepted Accounting Principles (GAAP):
- Services are provided by someone with a specialized skill, such as an architect or a doctor, or
- The services create or enhance a nonfinancial asset, such as a handyman who donates services to install cabinets.
Value donated services based on the fees the service providers would normally charge for similar work.
In-kind Services (Non-GAAP)
Many kinds of services are performed for nonprofits that don’t rise to the GAAP standards of a specialized skill or enhancing a nonfinancial asset. For example drivers of transport vehicles and tutors for children may be important, but would not be valued for purposes of audited financial statements. In these cases, you may wish to value them based on the Independent Sector’s rates for volunteer labor and record the value separately to this account. This information can be useful for management purposes and for grant applications.
Nonprofit organizations often receive free or discounted rent on the buildings they occupy. If this is the case, the value of the discount should be reported as in-kind rent income. Another scenario is free use of an asset. For example, a therapeutic horseback riding organization has free use of two horses which they value at $20,000 per year.
Gifts of stock or other securities are in-kind gifts. The market value on the day of the donation should be recorded in this account.
Donated Item Sale Proceeds
Occasionally we see nonprofits that receive gifts of goods for the purpose of reselling them. For example, one organization received tickets for athletic events and concerts which they would sell internally. Another organization received donated vehicles that they would sell. The amount of the contribution for GAAP is the amount ultimately received when the donated goods are sold.
In-kind Special Events Donations
This account is suggested as a separate account because we think it’s a good idea to record income from special events separately from rest of the organization’s income. Special events are peripheral activities engaged in primarily for fundraising purposes. Events may come and go from year to year. The important thing to track is the net income from the special events.
Right next to this account you would also need an account for Special Events In-Kind Expenses to record the offset from the income. This assumes any in-kind donations related to the event are used up in the course of the event.
Form 990 In-Kind Reporting
The reason for keeping the various kinds of in-kind contribution income categorized into these various accounts, besides the fact that you want to understand your major sources of in-kind income, is that Form 990 does not allow you to report the value of in-kind services or in-kind rents. You can only report the value of in-kind goods.
A note on unreimbursed out-of-pocket expenses – Form 990 explicitly forbids including unreimbursed out-of-pocket expenses, even if they are for tangible goods. It may be a sensitive donor issue, but if possible have the donor make a cash gift to the organization that is then used to pay for goods.
Be sure you set up in-kind donation accounts in your chart of accounts to cover the types of in-kind donations your organization receives. Then be sure you capture these in-kind gifts in your accounting records. You may be surprised at how much your organization benefits from in-kind donations. Or perhaps you will be inspired to seek more in-kind gifts when you consider the value to the organization and how easy it can be for donors to help in this way.