What Are In-Kind Gifts for Nonprofits?

Are you wondering how nonprofits account for all those donated items and services they receive? Understanding in-kind gifts is important for accurately tracking your nonprofit’s resources, staying compliant with IRS rules, and presenting a complete picture of your impact to funders. Below is a what-you-need-to-know overview of what in-kind gifts are and how to properly include them in your budget.

First, there are two commons types of in-kind gifts:

1. In-Kind Gifts of Items:
   These are tangible goods, such as furniture, equipment, supplies, or other physical items donated to your nonprofit. They are used directly in operations or sold to generate revenue. The value of these items is recorded based on their fair market value (FMV) at the time of donation, which is usually determined by the donor or by comparing market prices.

   • Where to Report Them: These gifts are recorded as both revenue and expenses (if used immediately) or as assets (if retained for future use) in your financial statements.

2. In-Kind Services:
   This category includes professional services like legal advice, accounting, consulting, or medical services donated by professionals with those skills. To qualify as reportable, the services must:

   • Be something the nonprofit would otherwise purchase.

   • Be provided by someone with specialized skills.

   • Be valued at their FMV, such as standard hourly rates.

   Important Note: General volunteer hours (e.g., event staffing or administrative work) don’t meet the IRS criteria for reporting as in-kind contributions. However, the total hours can be highlighted in narrative sections or financial statement footnotes to demonstrate community impact.

   • Where to Report Them: In-kind services are recorded as revenue and an offsetting expense in the financial statements, reflecting their FMV.

How to Quantify In-Kind Gifts in Your Budget

Now that you understand in-kind gifts, it’s crucial to know how to properly integrate them into your budget. Here's a breakdown:

1. In-Kind Gifts of Items

• Step 1: Determine Fair Market Value (FMV)
  Use the FMV provided by the donor or compare market prices for similar items. For example, if your nonprofit receives donated furniture, check prices for comparable furniture in your local market.

• Step 2: Record Them as Revenue and Expenses or Assets
  If the item is used immediately (e.g., office supplies), record the FMV as both revenue (gift received) and an expense (used up). If it’s retained (e.g., equipment), record it as an asset.

  • Example: A donor gives a $5,000 copier. Record $5,000 as revenue under "In-Kind Donations" and as an asset under "Equipment."

2. In-Kind Services

• Step 1: Confirm IRS Criteria
  Ensure the donated service meets the IRS criteria:

  • The service requires specialized skills.

  • The person providing the service is qualified in their field.

  • The service is something you would have otherwise purchased.

  For example, if a contractor donates $3,000 worth of renovation services, it qualifies because the organization would have paid for the service otherwise.

• Step 2: Record as Revenue and Expenses
  Record the FMV as both revenue (under "In-Kind Services") and an expense under the appropriate category (e.g., "Building Maintenance").

  • Example: A lawyer provides $2,500 worth of pro bono legal services. Record $2,500 as revenue and $2,500 as a legal expense.

IRS Reporting Requirements for In-Kind Gifts

1. Form 990:

   • Report in-kind gifts over $25,000 on Schedule M of your Form 990.

   • Include professional services that meet the criteria for in-kind reporting.

2. Acknowledgment Letters:

   • For in-kind gifts, issue acknowledgment letters that describe the donation but do not assign a monetary value. Valuation is the donor's responsibility.

3. Special Rules for Vehicles and High-Value Items:

   • For vehicles (and items valued over $5,000), donors must follow specific IRS rules, and nonprofits need to provide Form 1098-C when the item is sold.

Tips for Nonprofit Budgeting with In-Kind Contributions

• Budget Transparently: Include a separate line item for in-kind contributions in your budget to reflect their role in your operations.

• Use Notes for Volunteer Hours: Even if general volunteer hours don’t qualify for in-kind reporting, consider including them in narrative sections to showcase the community’s support and your organization's impact.

• Work with Donors: Encourage donors to provide FMV documentation, especially for high-value or unique items, to ensure accurate reporting.

Recording and valuing in-kind gifts the right way will help show the full range of your nonprofit’s resources while also while acknowledging the valuable contributions of your community and partners!