Documenting In-Kind Donations for Yourself, Your Donors and The IRS

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Many organizations forget to include the “replacement” value of the in-kind donations they receive in their expense projections. This means they may find themselves in a tough spot if donations reduce and they are not prepared to cover the additional expense. Estimating the value of donations can be done in a variety of ways including asking the donor, obtaining the current market value or utilizing survey documents to identify the average cost of a service or skill. In addition to identifying the current value of the in-kind donation, organizations must systematically apply the depreciation expense of these items to their budget every year. These steps are essential to accurately reporting your budget internally, to your board members, your donors and the Internal Revenue Service.

You must keep in-kind donations in your budget.

In-kind donations may become items that you need to budget for when they are no longer provided in-kind. For example, imagine that an organization receives free office space from a board member early on in their existence, but then the board member is no longer able to afford the costly donation. Office space is one of the most costly budget items, and if the organization did not have in-kind donations noted in their budget, they may not be prepared for the large budget jump required. If the organization had been documenting the in-kind donation, they would be aware of the market value of that donation and the impact that losing the donation would have on their budget. Additionally, disclosing this information to funders would have helped to reveal the full budget picture.

There are several steps when documenting the value of in-kind donations. This includes first estimating the value of what was received. There are many ways to go about doing this and many places that this information needs to be documented. The value of the donation also needs to be assessed for depreciation or loss of value to accurately budget each year. Finally, the accuracy of documenting in-kind donations will result in more accurate reporting for the IRS.

There are three places where the value assigned to an item should be documented.

The first is to the donor when you are acknowledging the donation, the second is to the IRS for reporting purposes, and the third is in your organization’s budget. There are also three ways to consider determining the value of an in-kind donation.

  • You can ask the donor for the traditional cost of the donated services and/or goods.
  • You can obtain quotes from competitors to determine the “going rate.”
  • You can use a salary survey document to determine the average cost of the skill level needed for the services provided.

As an example of determining value, imagine you receive an in-kind donation of a space for your office. The office space can be calculated by the per-square-foot value of the building, as determined by a local realtor. For example, at $2.00/sq. foot, a donation of classroom space of 150 square feet would equal $300 per month. An in-kind donation of space can be broken up into smaller units, but each unit cannot be used for more than one program or initiative. Even if the classroom is used for more than one program, the whole in-kind amount cannot be claimed for each program.

Click to open interactivity Calculating in-kind donation value.

Calculating in-kind donation value.

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Depreciation is the reduced value over time of tangible items.

Goods such as office equipment and office furniture depreciate in value over time because of wear, tear, and aging. In-kind donations that depreciate in value should be added to your organization’s depreciation schedule. An asset remains on a depreciation schedule until the asset becomes fully depreciated or is discarded.

A simple explanation for the process is below. Generally accepted accounting principles (GAAP) require a rational and systematic approach to depreciation, as well as consistent financial reporting. For more detailed guidance, speak with your accountant.

  1. The first step is to determine the current value of the good. For example, a computer purchased a year ago might have cost $650, but according to a sales representative at a local store that sells the current model of that computer, the current value of the year-old computer is $400. 
  2. The second step is to determine the anticipated “useful life” of the computer. In the US, tax authorities have given computing hardware a prescribed depreciable life of five years. The computer was used for one year already, so it has a “useful life” of four years. The computer will depreciate in value from $400 to $0 during those four years. The resulting $0 value is because the asset has no residual value or in other words the asset could not be retired or scrapped for any value.

The simplest depreciation schedule is Straight Line Depreciation. This is when you spread the expenses evenly across an asset’s depreciable life. For the computer example, this would mean you would claim a $100 (Current Value of $400/Useful Life of 4 = $100) depreciation expense each year for 4 years. Other types of schedules have varying percentages for each year of depreciation.

Documenting the in-kind donations that you receive will ensure that you have the information needed for the Internal Revenue Service.

Talk to your accountant to learn more about which donations require documentation, and be consistent with which donations are documented and which are not. Many organizations put together an in-kind form that is a guide to streamline the process of recording, reporting, and acknowledging gifts. Information typically provided on the form to be filled out by the donor includes:

  • A description of the gift (Note if the gift is used. If so, indicate how old it is and its condition)
  • The date the gift was received
  • The contact information of the donor
  • The estimated fair market value of the gift and how the value was determined
  • The name of the staff member who is knowledgeable about the gift
  • Space for any administrative information

Additional information about reporting donations can be found on the IRS Website.