In-kind donations of goods and services represent an extremely valuable source of financial support for nonprofits that is sometimes as important as cash donations. But noncash donations are idiosyncratic, which makes accounting for them a lot trickier than accounting for traditional cash contributions. Recording and documenting the financial impact of in-kind gifts can take a lot more steps and documentation to get right. Effectively managing accounting for them requires nonprofits to establish procedures and policies that govern when and how gifts are accepted, determine their fair market value and document how and when they’re used within the organization or sold by it for cash.

Why Accounting for In-Kind Donations Is Important

Some people believe that when no money changes hands, there’s no real need to record a transaction. But for nonprofits, the truth is that in-kind donations must be logged as meticulously as every cash, check or credit card contribution that is entered into the organization’s bank account. Plus, donors of goods and services can restrict use of their in-kind contributions to specific purposes and deadlines, just as cash donors do — and so nonprofits must track and document that they are following all such stipulations. Not only do financial and tax regulators, like the Financial Accounting Standards Board (FASB) and Internal Revenue Service (IRS), require nonprofits to track the value of their in-kind donations, but nonprofits need in-kind donation accounting to create the clearest possible picture of their true operating revenue and expenses, as well as the impact on their financial health of all donor contributions.

For example, a nonprofit that isn’t tracking on its balance sheet the value of free rent for its offices could be in for a shock if the donor decides to sell the property and the in-kind donation disappears. Suddenly, the organization is facing a shortfall of thousands of dollars in operating expenses each month that could have been anticipated with appropriate reporting of in-kind donations.

In-kind donation accounting is crucial for decision-making by nonprofit executives, board members and other stakeholders, and is an important component of financial transparency for donors and the broader community.

Key Takeaways

  • In-kind donation accounting tracks the financial impact of noncash donations gifted to nonprofit organizations.
  • Generally accepted accounting principles (GAAP) dictate that in-kind donation revenue be tracked separately from cash donations.
  • The IRS requires nonprofits to report in-kind donations of goods and certain intangible items as nonprofit revenue.
  • Many in-kind donations used in nonprofit operations are recorded as both revenue and expense in financial statements.
  • Nonprofits must document how donations of goods are used and when they are liquidated for cash.

In-Kind Donation Accounting Explained

In-kind accounting tracks the financial impact of noncash donations gifted to nonprofit organizations. This could mean anything other than money that is given to a nonprofit to keep its operations running or to be resold to bolster its cash, including:

  • Food and catering services
  • Furniture and office equipment
  • Medical supplies
  • Construction equipment
  • Professional services, such as accounting and pro bono legal work
  • Handyman or landscaping services
  • Real estate assets
  • Rent-free office or warehouse space
  • Stocks and other securities

The broad variability of potential in-kind donations and their sometimes unique nature can make it challenging for nonprofits to appropriately estimate their value and maintain meaningful records that track their disposition, as is required by generally accepted accounting principles (GAAP) and IRS rules, for example. So, nonprofit accounting needs specialized processes and software capable of tracking in-kind donations separately from cash donations. Nonprofits should have accounting procedures in place to record the fair market value estimate for each in-kind donation, to group in-kind goods and services into donation categories (starting with restricted versus unrestricted), to document how the gifts are used in nonprofit operations and to track if/when in-kind donations are sold or given away as part of the nonprofit’s mission.

When in-kind donations are kept by a nonprofit for its own use, accounting processes should record them as both revenue and expense. The revenue should be reported in the period in which the donation is made and the expense when the donation is used. In the case of a capitalizable item, such as a building or construction equipment, the donation would be recorded as revenue and as an asset on the balance sheet, rather than under expenses. When professional services are rendered as an in-kind donation, revenue and expenses appear in the same reporting period. Even though these accounting activities eventually “zero out” any income on the bottom line, including the information in financial records helps the nonprofit more accurately reflect its financial activity over the course of a year.

Accounting Standards for In-Kind Donations

Nonprofits that comply with GAAP — which is often required by state law, creditors and even certain donors — must track and report donated goods and services as revenue, separately from cash donations. GAAP nonprofit accounting standards for in-kind donations call these donations “nonfinancial assets” and stipulate that nonprofit financial statements must separate out contributed nonfinancial assets by the type or category of asset, such as food, legal services, real estate and so on.

GAAP calls on nonprofits to document how the organization establishes fair market value for each type of in-kind donation. It also requires nonprofits to establish and disclose their policies for how contributed nonfinancial assets are liquidated and whether/when these assets are sold.

Furthermore, whether or not a U.S. nonprofit’s financial statements comply with GAAP, it must report in-kind donations to the IRS through Form 990. This requirement is tied to maintaining an organization’s tax-exempt status. IRS requirements are similar to GAAP’s in that nonprofits need to document policies and procedures around accepting in-kind gifts, must break out in-kind donation values by category and are required to report the value derived from selling in-kind donations. For example, the IRS wants to know if an organization has an in-kind gift acceptance policy and a written conflict of interest policy pertaining to these donations.

Steps for In-Kind Donation Accounting

The challenges of nonprofit accounting demand that nonprofit organizations take a systematic approach to recording donated goods and services in their financial statements. Following the key steps outlined below can reassure organizations that their in-kind donation accounting accurately reflects the financial impact of each donation and that their financial reporting of in-kind donations complies with accounting standards and tax requirements.

Define Fair Market Value

Nonprofit accountants must determine and document the fair market value of any donated item. Typically, this is the price that an organization would normally pay on the open market to buy or replace that item. There are a number of ways that this valuation can be done, depending on the type of in-kind donation. For some goods, it could be a store’s advertised cost of the item at the time of donation, though if goods are provided in bulk, the valuation should take into account the appropriate volume discount. For assets like real estate, valuation should be based on comparable sales on the local market. If a nonprofit liquidates an in-kind asset immediately upon receiving the donation, then that actual selling price is likely to supersede other valuation methods. Professional services should be valued according to the hourly rate of the service times the number of hours donated.

Perhaps most important is that nonprofits establish and document their procedures for defining fair market value for the types of in-kind donations they accept. That way, recording values becomes an orderly and repeatable process.

Record In-Kind Donations

Once fair market value is determined, nonprofits are required to record the value of each in-kind donation during the reporting period in which the item or service was given — annually, at minimum. Good basic accounting workflows and technology are helpful here. When an organization uses an in-kind donation, it records an associated expense during that period. If the item is an asset that will be held long-term, it’s recorded in an asset account and depreciated appropriately over time. The IRS requires documentation noting how an in-kind donation is used within a nonprofit program, so processes should be in place to record that, as well. Organizations will also need to record and document an in-kind donation that is sold within three years of its donation. And if donors place restrictions on the use of in-kind gifts, nonprofits typically follow GAAP guidance for fund accounting to track and record their use separately from nonrestricted in-kind donations. Fund accounting is one type of accounting that is vital to the operation of nonprofit organizations.

Track In-Kind Donations Separately From Cash Donations

Following a change in disclosure rules instituted by FASB in 2020, nonprofits following GAAP standards can no longer lump together in-kind donations with cash donations in their financial statements. In-kind donations need to be shown as a separate line item, with subcategories for each type of asset or service. This aligns with IRS requirements, which mandate that nonprofits report in-kind donations separately in Form 990 and break them down by common categories. Tracking donations in this way helps nonprofits satisfy these reporting requirements. Doing so also gives organization leadership a way to track different types of in-kind donation categories over time to help develop more targeted fundraising and financial goals. For example, having at-a-glance visibility into how much fair-market expense is offset by volunteer design services can help nonprofit leaders quickly figure out exactly how much money they’ll soon need to reallocate or raise for the marketing budget should the chief design volunteer decide to move to a different town.

Report In-Kind Donations to Stakeholders

Financial statements prepared according to GAAP standards provide an ideal format to report in-kind donations to both internal and external stakeholders, like board members, executives, major donors, members of the community and independent auditors. Organizations will also need to report in-kind donations on IRS Form 990. The IRS requires that nonprofits make financial information from Form 990 available to the public. The Council of Nonprofits suggests that, for the sake of transparency and accountability, nonprofits should publish Form 990 and auditable financial statements and annual reports on their websites.

Nonprofit organizations also should have procedures in place to provide written acknowledgement to donors of their in-kind donations. The acknowledgement should provide a description of the item or services donated. While it is ultimately the donor’s responsibility to value donations for tax purposes, some acknowledgement forms give a reasonable estimate of what the charity would have had to spend to procure the item, usually with a caveat that the amount shown is for donor-recognition purposes only.

Maintain Proper Documentation

In addition to recording the value of in-kind donations as revenue, expenses and/or assets, organizations are required by GAAP and IRS Form 990 to be ready to provide supporting documentation of policies and procedures for in-kind gift acceptance. Some of the disclosures and policies that nonprofits should maintain documentation for include:

  • A conflict of interest policy.
  • A whistleblower protection policy.
  • A document retention/destruction policy.
  • A gift acceptance policy.
  • A policy on how, when and why gifts are sold.
  • Descriptions of valuation methods used.
  • Steps and policies in place to avoid private benefit from joint ventures.
  • Information about whether gifts were used by the organization or sold, including the sale value for liquidated gifts and, for gifts put to use, a description of the program or activities for which they were used.

Tax Implications of In-Kind Donations

One of the reasons why careful in-kind donation accounting is important is that in-kind gifts can carry weighty tax implications for both the nonprofit organization and the donor. Some IRS rules, for example, can be complex and dependent on specific circumstances. As a result, organizations with meticulous in-kind donation accounting can navigate the rules, protect themselves from tax liability and consequences, and provide donors with the documentation needed to write off eligible gifts.

Tax-Deductible Donations

Many types of in-kind donations are tax deductible for individuals and businesses. In fact, even nonprofits can reap deductions against their unrelated business income tax (UBIT) when they donate gifts in kind. When donating goods to a nonprofit, it is incumbent upon the donor to make the valuation for their tax return, using fair market value techniques. IRS Publication 561 is a 15-page guide on how to do so. It provides details on everything from determining the price of used goods to pricing out antiques and art work. A couple rules of thumb: Any in-kind donation over $250 requires a written acknowledgement from the nonprofit, and anything over $5,000 must be verified by an IRS-qualified appraisal, a document prepared by a professional appraiser and adhering to the Uniform Standards of Professional Appraisal Practice (USPAP).

Fair Market Value

As previously noted, establishing fair market value of in-kind donations has tax implications both for the donor and the nonprofit. Diving deeper, the IRS defines fair market value as “the price at which property, or the right to use property, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy, sell, or transfer property or the right to use property, and both having reasonable knowledge of relevant facts.” When doing a valuation, donors and nonprofits must consider the volume of items donated, as well as their condition. For example, a product provided in bulk — such as lumber to a house-building charity — would be valued based on industry-typical volume discounts, not the retail prices at a big box store. For used goods, the value would be greatly reduced, compared to the same items sold as new. In the latter case, comparably priced items from a thrift shop or a used merchandise ecommerce site can serve as the guide for determining fair market value.

Donor Limitations

The tax implications of in-kind services are trickier to understand and apply, in part because the treatment required from donors and the nonprofit is sometimes very different — even when accounting for the same donation. The difference usually comes from deductibility limitations placed on the donor. For example, for the donor, a gift of consulting hours, even by professionals like lawyers or accountants, cannot be deducted as the fair market value of their time. Instead, the lawyer or accountant can deduct only the costs they incur in the course of providing services — travel mileage, parking, supplies and so on. For a business donating the time of its employees, those employees’ actual salaries can be deducted (for the amount of time the employees are at the disposal of the nonprofit), not the consulting rate that the donating business normally charges for the employees to work in customer environments.

Meanwhile, for that same donation of legal or accounting services, the nonprofit’s financial statements must reflect the value of that consulting rate — which, in this example, would be considered the fair market value — as both revenue and an expense. The goal behind this approach is for the nonprofit’s finances to most accurately reflect the real value of its revenue and the real cost of its operations.

Several other types of in-kind donations must also be recorded by a nonprofit as revenue and expense, according to GAAP, but cannot be deducted by the donor, according to IRS rules. These include:

  • Advertising space
  • Broadcast air time
  • Discounts on services
  • Free use of materials or equipment
  • Free rent of real estate and facilities

As just explained in the context of lawyers and accountants, donors of the gifts bulleted above can write off the adjacent costs associated with giving the gifts. For example, the donor can’t write off the fair market value of free rent on a facility, but it can deduct all of the maintenance costs it takes to repair the facility while the nonprofit is using it. In the meantime, the nonprofit will still need to record both the free rent and the donated maintenance costs in its annual financial statements in order to comply with GAAP standards.

Reporting Requirements

In general, nonprofits are required to provide detailed reporting on the revenue from in-kind donations of capital assets and other goods on IRS Form 990, Schedule M, if the aggregate value of those goods is $25,000 or more. Items on Schedule M are broken out by predefined categories, such as food, drugs and medical supplies, cars, intellectual property and securities, among others. There are exceptions; for example, a donation of publicly traded securities must be reported on Schedule M, regardless of whether the aggregate value of all in-kind donations for the year reaches $25,000. Donated services or use of equipment, materials or facilities are not included in Schedule M, even if prepared for GAAP-compliant financial statements. At its discretion, however, a nonprofit can choose to discuss such donations in the optional spaces for narrative descriptions of program services on Form 990, Schedule O.

Unrelated Business Income Tax (UBIT)

Unrelated business income tax (UBIT) is a tax levied against revenue that nonprofits collect from lines of business that are not related to their charitable mission. Nonprofits have to pay UBIT on gross income from unrelated business that exceeds $1,000. The good news is that organizations selling donated merchandise do not have to pay UBIT for that income. As the IRS explains this exception: “A trade or business that consists of selling merchandise, substantially all of which the organization received as gifts or contributions, isn’t an unrelated trade or business. For example, a thrift shop operated by a tax-exempt organization that sells donated clothes and books to the general public, with the proceeds going to the exempt organization, isn’t an unrelated trade or business.”

Accounting for In-Kind Donations: Examples

The variability of different types of in-kind donations and the complex sets of rules established both by GAAP and the IRS — which largely overlap but aren’t the same — means that accounting for in-kind donations is far from a cookie-cutter affair. The way noncash donations are recorded and reported is situationally dependent. Here are some example situations to provide insights into how an organization would record and report certain common in-kind donations.

  • Rent-free office space: A charity organization arranges with a donor to use a building that previously was rented for $4,000 per month. Similar buildings in the local market rent at comparable rates. Per GAAP standards, the nonprofit reports $4,000 per month as revenue and the same amount each month as an expense, potentially categorized as occupancy or rent expense. If the donor also provides maintenance, the nonprofit’s financial statements will reflect those maintenance costs as both revenue and expense, as they occur. For tax purposes, the nonprofit does not have to separately report the rent on its Form 990, although the value of the rent would be bundled into its reporting of aggregate in-kind revenue.
  • Construction equipment: A nonprofit that builds playgrounds for underserved communities receives a donation of construction equipment valued at $100,000 by an IRS-qualified appraisal. The organization records the $100,000 as revenue and as a capital asset in its financial statement. It also includes this donation in its Form 990 Schedule M. Over time, the nonprofit will depreciate the value of the asset, which will be reflected in its periodic reporting.
  • Goods donated for a fundraising auction: A nonprofit that runs an annual fundraising auction gala accepts in-kind donations to sell at the event throughout the year. The nonprofit logs each item as in-kind revenue at the fair market value at the time of donation and adds it to auction inventory in an asset account. Once the auction happens, the sale price is recorded as cash and the inventory is reduced, with any difference between the recognized fair value and the actual sale price recorded as an adjustment to the original contribution revenue. The nonprofit would need to report the in-kind donations on Form 990, Schedule M, and, for items worth $500 or more (and held for less than three years), would also need to report the sale on Form 8282.
  • Discounted medical supplies: A nonprofit clinic arranges to purchase supplies from a medical manufacturer at half off their fair value. In a given year, the clinic pays $10,000 for $20,000 worth of supplies. The clinic would record in-kind revenue of $10,000 and record an expense of $20,000. It would also include $10,000 worth of in-kind donations under “Drugs and medical supplies” on its Schedule M.

Manage All Your Nonprofit Accounting Challenges With NetSuite

In-kind donation accounting requires assiduous recording of revenue and expenses related to noncash contributions by donors and a lot of documentation for both the nonprofit and the donor. NetSuite Cloud Accounting Software provides nonprofits with all the tools they need to record the revenue from in-kind gifts, organize the gifts by type and track their usage over time, so that their use as an expensed item, capitalized asset or liquidated asset is recorded appropriately. NetSuite can automatically generate GAAP-compliant reporting that also maps closely to IRS Form 990 line items — and it can easily be further customized. This means that NetSuite can help nonprofits take the stress and complexity out of tax compliance for in-kind donations.

More broadly, NetSuite provides a flexible set of nonprofit-specific features tailored to the diverse revenue streams that nonprofits depend on, including grants, cash donations, pledges, gifts in-kind, services and ticket sales. What’s more, the NetSuite Social Impact program puts NetSuite within grasp of the most frugal of nonprofits. The program provides NetSuite Cloud Accounting software to eligible nonprofits on an in-kind basis. NetSuite offers a range of programs geared to software donation, pro bono consulting and training to help nonprofits worldwide level up their accounting practices and fuel their financial health.

In-kind donations offer a valuable way for nonprofits to boost their fundraising efforts. However, in-kind donation accounting requires nonprofits to jump through more hoops than for cash donations in order to properly record and report these noncash contributions. Nonprofits need to plan ahead by introducing a robust set of processes and sound technology to appropriately track the financial impact that is part and parcel of in-kind donations.

#1 Cloud
Accounting
Software

Free Product Tour

In-Kind Donation Accounting FAQs

How do you record in-kind donations in accounting?

When recording in-kind donations, a nonprofit recognizes both the revenue and the expense (or asset) associated with the donation, usually evaluated at fair market value. This approach ensures that the organization’s financial statements accurately reflect its activities, without inflating its financial position.

Are in-kind donations an expense?

If in-kind donations are used within a nonprofit’s operations, they should be logged as both revenue and expense in financial statements for the relevant periods — that is, the revenue at the time of donation and the expense when the item or service is put to use.

Can you capitalize in-kind donations?

Yes, if an in-kind gift is a capitalizable item, like real estate or capital equipment. Then it can be recorded in a fixed-asset account.

What accounting standards apply to in-kind donations?

Generally accepted accounting principles (GAAP), as governed by the Financial Accounting Standards Board (FASB), apply to in-kind donations.

How do I determine the fair market value of an in-kind donation?

Fair market value is determined by figuring out what it would cost on the open market to buy the product or professional service had it not been donated. Typically, fair market value of goods is provided by the donor. The method for determining fair market value varies, depending on the nature of the good or service.

What are the tax implications of in-kind donations?

In order to maintain their tax-exempt status, nonprofits are required by the Internal Revenue Service (IRS) to report in-kind donations on Form 990 each year, even though they usually owe no taxes. For donors, the deductibility of in-kind donations varies: They can deduct the fair market value of in-kind donation of goods but only some intangibles are deductible, such as services. Instead, donors can deduct actual costs incurred in providing the donated services. For example, they cannot deduct the market value of rent for donated office space but can deduct costs incurred to maintain the office space while the nonprofit is using it.

What documentation should I maintain for in-kind donations?

Nonprofits should document their process for determining fair market value of in-kind donations, record the value, maintain descriptions of how the items are used, document the sale of in-kind donations within three years of donation, as well as documenting other policies around these donations, such as gift acceptance policies and conflict of interest policies.

What are some best practices for in-kind donation accounting?

The best practices for in-kind donation accounting include creating a repeatable process for determining fair market value of donated items or services, recording the value for each in-kind donation, breaking down these donations separately from cash donations, documenting how these donations are used and providing donors with a written acknowledgement of their gift.