Accounting for In-Kind Donations

How to Acknowledge and Record In Kind Gifts

At times, churches and nonprofits receive in-kind donations, which include items, use of property, and professional services. Managing the accounting for such donations can be challenging. Explore ways to properly recognize and record these contributed goods and services.

In-kind donations are basically gifts of tangible and intangible personal property and donations of services.

There are typically three categories of in-kind donations. They are

• contributions of tangible and intangible goods
• use of property
• donations of services

Some examples of tangible gifts in-kind (physical goods that can be touched or held) include:

• furniture donation
• equipment donation
• food donation
  
• clothing donation
• inventory, and supplies

Some examples of intangible gifts in-kind (goods have value but do not have a physical presence) include:

• trademarks
• copyrights
• patents
• royalties
• advertising

Examples of use of property include:

• leased space
• discounted rent   

Gifts in-kind can include professional services rendered by:

• accountants and bookkeepers
• lawyers
• plumbers
• electricians
• nurses and physicians
• Computer programmer, designers, technical support, etc.
• Contractors

Now that we have established what a in-kind donation is, let's move on to "how and when" to record those donations!

Donation Valuation:

Starting with the importance of having a written policy, every nonprofit organization and church should establish guidelines for accepting or declining in-kind donations. A general rule is to reject items that cannot be utilized or sold.

When deciding whether to document these donations in your financial records, a good guideline is to record in-kind contributions that hold value and would have been bought if not donated by the organization. For instance, if a donor provides computers and printers for the church's office use, their value can be recorded as fixed assets.

Valuation methods for in-kind gifts vary depending on the donation type. Bulk donations from retailers or manufacturers, like canned goods or backpacks, can be valued at wholesale prices. Property donations, such as rent discounts, should be valued at fair market rates.

For donated services, recording is necessary when the service demands specialized skills or would have been purchased otherwise. However, despite being recorded in accounting, the IRS doesn't permit tax deductions for donated services, so contribution receipts are not issued (more on that below).

How to Record In-Kind Donations in your Accounting Books:

How you record the in-kind contribution in your accounting records will depend on your accounting software. In most accounting systems, you will record the gift in-kind as a journal entry. However, you will need to first set up some new accounts in your chart of accounts...such as:

• In-Kind Contributions (income)
• Professional Service In-Kind (expense)
• Supplies (expense)
• Equipment In-Kind (expense...if donation NOT considered a capitalized asset)
• Assets In-Kind (fixed asset)

If you use QuickBooks:

Lisa London's book "Using QuickBooks Online" explains how to set up and record in-kind donations with journal entries and gives step by step examples. Let me stop here and encourage EVERY church or nonprofit that use or plan on using QuickBooks Online (QBO) to purchase Lisa's book and keep it beside your computer! It has hundreds of screen shots and step by step instructions on pretty well everything you need to do to make QuickBooks work efficiently for you.

If you use Aplos:

See Alex's great examples of journal entries for recording donated items.

Some in-kind contribution journal entry examples...

An accountant donates 5 hours a month to do some accounting work that your organization would have had to pay another accountant to do. She regularly charges $100 per hour to do a similar service. To record this gift in-kind you would:

• Debit Professional Service In-Kind $500
• Credit In-Kind Contributions $500

Another example:

A business donates a portable building valued at $12,000. Assuming that your organization has a policy to capitalize assets of this value, you would record this gift in-kind like this:

• Debit the fixed asset account (Portable Building In-Kind) $12,000
• Credit the In-Kind Contributions $12,000

Another business donates an air conditioner valued at $800. Assuming that your organization has a policy to expense assets of this value, you would:

• Debit the Equipment In-Kind (expense account) $800
• Credit the In-Kind Contributions $800

How to Acknowledge In-Kind Donations: 

In addition to recording the gifts in-kind in your accounting systems, it is appropriate to acknowledge the non cash contribution by generating a donor receipt. Unlike the recording of those donations, you should NOT (in most cases) include a value on a non cash contribution receipt. See an example of a non cash contribution receipt. 

The exceptions to this rule include donations of vehicles, boats, and planes. The rules regarding those donations and donations valued at $500 plus can be found on the IRS's site and my ebook package "Donation Guidelines" is a great resource as well as it details how to handle and acknowledge those donations along with other uncommon contributions. 

Note: the IRS does NOT allow charities to issue charitable contribution receipts for donated services! Donated services such as the accountant work discussed above is not a tax deductible contribution for the donor (Rev. Rul. 162, 1953-2 C.B. 127). See more about donated labor and free rent donations in Book 2 of the Donation Guidelines Package.

Also...you cannot issue a contribution receipt for discounted or free rent as the IRS has determined that rent free use of real or personal property does not represent a “payment” under IRC 170(a)(1)(Rev. Rul. 70-477, 1970-2 C.B. 62). BUT if the donor donated all or part of real property and transferred the title to the nonprofit, you could issue a noncash contribution receipt =)

See more on acknowledging contributions!