Charities, churches, and non-profit organizations heavily depend on donations for their daily operations. However, apart from the usual cash donations, which most non-profits prefer, some are in the form of in-kind donations. Below is a guide highlighting the important things you should know about these forms of donations.
What Does In-Kind Donation Mean?
Most people don’t know what does in-kind donation mean. However, in-kind donation meaning is quite straightforward. They are typically non-monetary gifts given to charities and non-profits. These include goods, services, use of equipment or facilities, and labor. If done right, in-kind donations are beneficial to both parties. To donors, it is an opportunity to dispose of surplus goods or items that would otherwise go to waste.
On the other hand, non-profits benefit from items they don’t have without spending. In-kind gifts are specifically important during times of difficulties or crisis. For instance, medical supplies, manual labor, building supplies, and more can help during disaster relief. In-kind gifts are beneficial to non-profits in the following ways:
- Waste reduction – the phrase “one person’s trash is another’s treasure” is true in the case of donations. In-kind gifts are mutually beneficial to both the donor and non-profit. The donor gives out what they have in excess or have no use, while the recipient acquires what they don’t have. Depending on the gifts given, this can benefit the environment by reducing its carbon footprint.
- Philanthropic efficiency – donating already made items is a better way to help organizations than giving money. For instance, if a carpenter donates $250 to the church instead of donating already made chairs, the church will still have to convert the donation into chairs. The cash gift creates more work for church staff, which may not be efficient.
- An opportunity for corporate philanthropy – companies often have a lot of items at their disposal. They constantly purchase, sell, and trade commodities. In this process, they might be left with excess or unused items, such as office supplies. In-kind gifts present an opportunity for such companies to achieve their corporate social responsibility.
What Can Be an In-Kind Donation?
While there is a lot to consider when deciding what is an in-kind donation, all options should be non-monetary. Generally, the in-kind donation form can include:
- Physical properties
- Intangible property, such as intellectual property, patents, and copyrights
- Rent-free space
Anytime a party offers physical items or shares professional expertise with charities or non-profits should be considered an in-kind donation.
What’s the Problem with In-Kind Donation?
While all forms of donation are welcome for charities and non-profits, the main problem with in-kind gifts is if they don’t fit the non-profit’s strategy. Unfortunately, non-profits have limited control over the form of in-kind donations provided by donors. As such, some organizations end up with donations they already have or gifts that require more commitment than they anticipated.
Obviously, the donation was well-intended, and the donor felt good giving out, but the gift isn’t good for the organization. A perfect example of a problematic in-kind gift is a donation of an old vehicle or boat that requires extensive repairs before becoming sea-worthy. Non-profits may receive these gifts to encourage generosity, but dealing with the accumulating pile of unnecessary items becomes a challenge.
That said, you can avoid these problems by establishing several parameters to guide donations. These parameters include;
- Creating a gift acceptance policy
Non-profits and charities should create a gift acceptance policy to avoid filling their offices with unnecessary items while helping donors contribute the best in-kind gifts to support their mission. Typically, a gift acceptance policy is a document that outlines acceptable things and what cannot be accepted by the organization.
The length and details of an acceptance policy vary from one organization to the other, depending on the scope and size of the non-profit. However, it should include the following key features:
- Type of gifts that are acceptable or appropriate and those not appropriate
- The threshold for acceptance of gifts. For instance, the specific value of donations acceptable or what is acceptable within a given period
- How gifts are categorized and evaluated
- How unacceptable gifts should be handled
- Gifts that are only acceptable after review
- Whether in-kind gifts should be anonymous
- Gifts agreements
While a gift acceptance policy should guide all donations, gift agreements should be used when dealing with large in-kind gifts donated for specific purposes or gifts accompanied by complex donor requests. Gift agreements are written to ensure that the donor and organization have a mutual understanding of the purpose and nature of the gift.
Gift agreements can help in case of disputes. Even though it isn’t a legal document, it ensures that the donor and organization are on the same page over the donations. Both parties should sign the agreement, and it should feature the following:
- Name of donor and non-profit organization
- Start and end date
- Description of the donation
- The specific purpose of the gift
- How the non-profit organization acknowledges the gift
- Monitoring and reporting to be done by the non-profit
- Clause indicating the possibility of change of gift purpose due to unforeseen events
Taxability of In-Kind Donations
One of the main challenges of in-kind donations is how to record and value these gifts. The IRS has lengthy and detailed rules for in-kind donation accounting and reporting. Therefore, consider working with experts familiar with the laws guiding these forms of donations to ensure that your reports are accurate and comply with tax regulations.
Generally, donations made to companies registered as non-profits are exempted from paying federal income tax, and donors qualify for deductions. However, the donors’ corporate status determines qualifying for tax deductions on these donations.
For instance, sole proprietorships and partnerships can deduct the actual cost and not the fair market value of the items. If you donate a car worth $X and it is later sold by the non-profit for $Y, you can only claim $X in your deductions.
That said, most non-profits also have challenges recognizing in-kind donations. Essentially, non-profits should send their donors an acknowledgment note with the description of the goods they donated, the date received, and the organization’s tax ID number. The note should also confirm that the donor didn’t receive anything in exchange for their contributions. Additionally, you shouldn’t assign value to the goods or services provided.
Examples of In-Kind Gifts
Any non-monetary donation made to non-profits can qualify as an example of in-kind gifts. In-kind donations take on diverse forms. They include:
- Physical or tangible gifts, such as computers, furniture, office equipment, software, and clothes.
- Professional services or intangible gifts, such as a meeting space, mail services, photocopy, legal, marketing, web development, and accounting services.
- Cash equivalents, such as bonds, stocks, and mutual funds.
- Payments made to third-party creditors on behalf of the non-profit.
How Should In-Kind Donation be Reported?
Reporting these donations should be done by someone who understands the in-kind donation definition and its diverse forms. Interestingly, in-kind donations are considered as revenue. Therefore, apart from capturing them in the donor acknowledgment, they should be recorded as contribution revenue and as assets or expenses in the general ledger.
The fair market value of donated goods is based on what the organization would have incurred if they had purchased the donated items. On the other hand, donated services should feature in financial statements if they require special skills that would be paid for if they had not been donated.