Below are questions we have received regarding in-kind donations. The PPC Guide to Contributions has the best guidance out there on in-kind donations and I highly recommend it (along with the PPC’s guide to Expenses) as a worthy investment for your nonprofit’s financial well being.
How do we record items for auctions?
For question about the specific journal entries for donations to be auctioned off or re-sold. Here is an excerpt from the great PPC Guides:
“Organizations may receive contributions of gifts-in-kind to be used for fund-raising purposes. A common example is where an organization receives tickets, gift certificates, or merchandise from donors to be sold to others during an auction. An organization should recognize the donated item to be used for fund-raising purposes as a contribution and record it at its estimated fair value. When the item is subsequently sold (such as at auction), any difference between the item’s initially estimated fair value and the amount ultimately received should be recognized as an adjustment to the original contribution amount.
For all practical purposes, the initial estimation may not be that important – the eventual contribution amount that is recognized will be what someone was willing to pay for the donated item. Organizations should use their best estimates when initially valuing the donated items and adjust the amounts later when the actual auction takes place. As a practical matter, the time period between the donation of items for an auction and the actual auction may be short. Accordingly, some organizations may wait to record the items until they are actually sold. That would not be appropriate, however, if the items were received before year-end and the auction was held after year-end.
Example: An organization is given a piece of jewelry valued at $3,000 to be auctioned off to the highest bidder at the organization’s annual fund-raiser. The journal entry to record the initial gift-in-kind contribution is as follows:
Debit – Asset $ 3,000
Credit – Contribution revenue $ 3,000
At the fund-raiser, an individual purchases the jewelry for $5,000. The journal entry to adjust for the sale is as follows:
Debit – Cash $ 5,000
Credit – Asset $ 3,000
Credit – Contribution revenue $2,000
If the jewelry sold at auction for only $1,000, the journal entry to record the sale would then be as follows:
Debit – Cash $ 1,000
Debit – Contribution revenue $2,000
Credit – Asset $ 3,000
How do we value food donations for our “Taste Of…” event?
Fair value must be determined. According to SFAS 157, Fair Value Measurements, the fair value is, “the price that would be received to sell an asset or paid transfer of liability in an orderly transaction between market participants at the measurement date. The quoted price for identical assets in an active market is the most reliable evidence.”
For this question, if a restaurant is providing you with 300 deserts, what do they sell the deserts for? If they are catering at your event, what do they normally charge for catering? Those quoted prices (or better yet and invoice) would be what you would use to value the donations.
Can the suggested starting bid on an item to be sold at auction be used as the fair value?
Yes, with exceptions. If a vendor gives you something to auction for your charity event and places a “suggested starting bid” sticker on it, that can be used. But if you have sold similar items before and what they suggest doesn’t match what you have used in the past that suggestion won’t work. Checking other resources on how the item might be valued would also be a good idea.
We have a golf tournament where everything is donated. Donors then buy tickets for the event. Is the whole ticket deductible to the those donors?
From what I can tell it is not. The non-deductible portion of the ticket represents the estimated fair market value of the goods or services received by the donor in return for the contribution. How much would the donor normally have had to pay to play golf at the location? The fact that the nonprofit did not incur any costs for the facility is irrelevant to the benefit received by the donor.
What are some resources for valuing donations?
- Association of Evangelical Relief and Development Organizations
- Determining the Value of Donated Property (IRS pub. 561)
- Salvation Army’s Donation Valuation Guide
- TurboTax ItsDeductible
This article originally posted on this blog.