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)
- eBay.com
- Salvation Army’s Donation Valuation Guide
- TurboTax ItsDeductible
This article originally posted on this blog.
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Hmm….
Now that’s what I call news!
Thanks for putting this out in the open for us to read.
Thank you for this information. Just as a followup, regarding the example of the jewelry valued at $3,000. If we are to recognize to our donor this donation, we should state that the value donated is $3,000 – correct? OR the value that the auction actually brings?
You are welcome Barbara. I think it is extremely important that nonprofits do not put any value on the donor recognition form or letter. That starts to movie into the area of tax advice and it is an area nonprofit don’t need to be in.
The IRS has a nice, easy to follow guide on donor acknowledgment, Pub. 1771, Charitable Contributions Guidelines for Donors (http://www.irs.gov/pub/irs-pdf/p1771.pdf). Please give that a read for great sample language and rules.
Alan
Should donated building repairs and maintenance services including materials be capitalized or expensed?
Good question Eben. What is your organization’s capitalization threshold? That is, at what dollar amount are things capitalized over the items useful life rather than just being an expense at the time of purchase? Every organization needs to have a formal policy on this, and I recommend at least $1,000.00 for all orgs.
But your also talking about a service provided to the nonprofit. Assets, tangible goods, are what most nonprofits capitalize if they are above the cap, threshold. Patents, copyrights, software and other intangibles can also be capitalized. I don’t think what you describe would be.
But do the donated services improve the value of the building? Are they improvements to the building, like a new heating system or floors? Those would be capitalized too, if they exceed your cap. threshold amount. But general repair and maintenance expenses would not be capitalized.
Other ideas?
Thanks for your input. I agree with your analysis. The improvement has to do with painting and resurfacing of a building $40K, installation of new doors $10K and window repairs $5K. I think the $40K, and $10K should be capitalized while the $5K expensed. What do you think? By the way the capitalization threshold on $2.5K.
Without knowing more, and if the window repair improves the value, it seems like you could capitalize it all.
Hi there,
We have a graphic designer (who is a Board member) volunteer quite a bit of time to creating our marketing materials. I think this is specialized enough to qualify as a professional service. If so, since her services are over $5K, how do you get this valuation done cheaply. She has provided deliverables that we can tie to the work, so proof isn’t hard, I think.
Thanks,
Vaychan
Thanks for the Question Vaychan. You would need invoices from the board member in order to track the value for the income and related expense entries.
I think you may be thinking of the $5,000 value for getting an appraisal, which is not required for donated professional services, just items. There is more here that might help: http://www.notforprofitaccounting.net/2008/12/10/contributed-services/
Hi Alan,
How do I record prizes or do I need to? We often receive items like gift certificates that we give away at our events. Should I record these as contribution income? Then record them as prize giveaways?
Thank you!
Emily
Emily,
I definitely would record them, especially if the donor od the prizes is considering them a charitable contribution to the organization.
Hi Alan – I have a question regarding the accounting treatment of items received to be sold at auction.
On your page, the ultimate financial statement treatment of the donated item will be (let’s say a ring ultimately sold for $3000, for example):
Debit Cash – $3000
Credit Contribution Revenue – $3000
However, I have also seen this treatment as well, which ultimately affects 4 accounts (let’s say in this example, the ring had a $2500 FMV but sold for $3000):
Debit Cash – $3000
Credit Auction Sales Revenue – $3000
Debit COGS Auction Sales – $2500
Credit Contribution Revenue – $2500
Are both of these methods correct? I fully understand the differences between these two methods, but I guess I’m just trying to get a handle on how is the “best” way to handle this. I am the accountant for a relatively small animal rescue, and the person doing the books prior to me did method #2. I, however, don’t necessarily like this method as, at least in my eyes, it appears to overstate revenue and expenses to the organization for the year.
For reference – the link below is where I found documented treatment of method #2. Any thoughts or insights are appreciated. Thanks!
http://books.google.com/books?id=bKvRYkABzTsC&pg=PA102&lpg=PA102&dq=accounting+treatment+of+donated+inventory+auction&source=bl&ots=sqJULTZlqw&sig=POzshZ2z6s0fO0P8vV_mwZshIlc&hl=en&ei=VrGoTej8C5KWtwenqJ3dBw&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBcQ6AEwAA#v=onepage&q=accounting%20treatment%20of%20donated%20inventory%20auction&f=false
Hi Nick,
The second method works fine, I just don’t like using COGS accounts too much as I think it can be a distraction for most folks when they look at a nonprofit’s financials. But that is solely my opinion. How ever you record the item into your books as an asset, then get it off the books and record the final contribution amount works. There is always at least two transactions, per the example above and the one you link to (thanks for that by the way!), and what ever works best and is accurate is the right one for you.
With the second entry:
You can also use an expense account instead of a COGS account. In our instance we use an account called Auction Expense.
While the first entry is technically correct, most auditors would prefer to see it the send version.
Alan,
My question concerns donations of consumable supplies such as postage stamps. My initial thought would be to debit an asset and credit contributions by the amount on the receipt from the postal service. But how do I reduce the asset as the stamps are used without debiting an expense?
Just my two cents:
I believe in your instance, you do need to end up debiting expense. In the end, it makes sense:
To record the receipt of consumable postage:
Debit Prepaid Postage (or whatever asset/prepaid you want)
Credit Contribution Revenue
To record the usage of postage:
Debit Postage Expense
Credit Prepaid Postage
Although you received the postage as a donation, I believe it is correct to record the usage as an expense since you would’ve had to go out and buy postage and record it as an expense, had you not received it as a donation.
Nick,
Thanks for the help. In helping me think it through, it does make sense. The postage (or whatever consumable asset it may be) is expensed as used, while the donation income was recognized at the outset.
Thanks again.
Nick’s breakdown was spot on, that is how I would do it too.
If a NFP hosts a gala or soiree event and each of the guests receive a gift certificate as part of the gift bag from one of the sponsors. How do you account for the gift certificate amount if some of the guests will not exercise the gift amount before the expiration date. Please assume that the “gift certificate” has several terms and conditions such as minimal party size, tax & gratuity not included, limited items it can be used towards, etc.
It may be important to note that I am researching this topic to politely explain to a potential donor why fair market value cannot be calculated and thus this isn’t a donation which can be considered an in-kind donation. The obvious reasons being overly aggressive stipulations and expiration date means most ticket holders for the gala/soiree will not exercise this gift certificate.
I’m curious to see what others say but one question, is there a fixed dollar amount of the gift certificate? If yes then I would say that would be the in-kind donation amount regardless of any other stipulations.
I believe there is a fixed amount on the gift certificate but as I mentioned there are several terms and conditions which would probably make it unlikely that most of the attendees of this event from exercising the gift certificate.
I have a donor who has pledged the following:
15,000 Annual Campaign
15,000 Building Campaign
15,000 Gift in Kind
Since this is a pledge not the receipt (which is over 3 years) how do I or even can I record the gift in kind? I have never seen this done.
Any help would be greatly appreciated!
Thank you
That’s a good question Linda. I hope others will comment but you could enter the 15,000 in kind pledge as deferred revenue and the offsetting expense as a prepaid expense. The when the donor makes good on the in kind pledge move the prepaid and deferred entries to income and expense. The easiest way would be to not book it at all until you receive the in-kind. Is it something that you can legitimately count as a contribution?
Hi there,
I have another question. We get tickets from an airline as an in-kind donation, with no restrictions on use. We choose to use it to subsidize the cost of travel for our chapter leaders training.
The tickets are usually given a couple months earlier than when the travel expense occurs (and it crosses different fiscal years), should we be recording the tickets when we receive them or when the expense occurs? Because there is a market value on these tickets, I’m inclined to say the revenue is separate from the expense and should be recorded on receipt date, however it’s a guess. What are your thoughts?
Thanks!
Nonprofits are required by GAAP to use accrual accounting and to acknowledge the gift as income when the gift is in your full possession. Which means you would record the income from the ticket when you receive it.
Thanks for the question!
Hello,
I have a question about how to record a gift from a donor. The organization has agreed to pay the individual a $5000 bonus for referring a top candidate for recruitment. He told us that he wanted us to keep $1000 of that as a donation to our org, and just pay him the remaining $4000. How should we record this? It doesn’t seem to me like this is necessarily a gift of in-kind specialized services for the recruitment. Any advice?
Thanks much!
The cleanest way to handle any transaction like this, where you are paying some one and they want to donate the services to a nonprofit, is to cut them a check and allow them to make the donation as a separate transaction. Even if the service qualifies as a donation under IRS and GAAP rules, it is just easier to have two separate transactions.
The Executive Director of our organization is a licensed therapist and performs many day-to-day duties supporting the clients of our transitional housing facility. If she was not so generous with her time we would need to hire someone with her same skill set. We simply would not have clients and would be unable to serve clients without her (or a hired ED).
I would like to recognize in our financial statements this in-kind contribution and the benefit we receive from her time. We know from salary surveys what it would cost to hire an Executive Director. I would like to record the value of her services as an “In-Kind” contribution with an offsetting expense of “In-Kind Professional Services.” I believe that this would most accurate representaion in our financial statements.
Would I be in compliance with GAAP if I recorded this in our books.
Hi Rex,
The ED part of her time probably won’t fly as in-kind, but you may be able to use her therapist-related time as an in-kind using her rates she charges other clients. But you are correct on how to book the income and expense of the time you are allowed to report.
Alan
If a non profit purchases a book collection from an individual for a value below what it would receive when auctioned for the organization can the organization give the individual a tax write off for the additional value over what was paid?
Hi Debra,
You would need some kind of proof as to the value of the collection from a qualified appraiser to do so. If the value is reported to be over $5,000 yo have to have it appraised.
Alan
Alan,
Thanks for the response. The collection has been valued by a book dealer at $2500. We are proposing to pay the individual $2500 from the nonprofit. Our question is that we plan to auction the items at our annual convention and we want to know if we raise say $3500 can we give the individual a receipt for a tax deductible donation of $1000.
Debra
You could not Debra. You are talking about two separate and unrelated transactions: You buying the books and then selling the books. In your example above the seller of the books gets no tax advantage and the winner of the auction gets the $1,000 deduction as he paid more than the market value.
Alan
Enlgiehtinng the world, one helpful article at a time.
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I am confused about gifts in kind still. We have an auction and I think what you are saying is when we get items donated to auction we should account for them at the stated donor value and then adjust for what the item sold at as the true donation after the event. My bookkeeper thinks that we also have top account for these items as an expense – since she said we would have had to buy them if we didn’t get them donated. I disagree and think they are simply a donation of value and there is not corresponding expense – which would in effect wipe out the value and inflate our expenses for which we had none.
Hi Sylvia. If you were keeping the donated item for your own use your bookkeeper would be correct, you would have to have an offsetting expense entry.
But since this is donated for an auction the entry would be as described above in the post. This illustrates a two stage donation process: item for auction + auction proceeds = total donation. In the end it is still a donation to the organization that raises your cash balance and income, and that is it. Does that help?
Yes thank you very much….. sometimes ED’s do know a thing or two….. (smile)
I’m interested in the answer to Sylvia’s inquiry.
Hi Allan,
We got the development of our customized website donated to us. Our auditors suggested that we should be getting independent estimate of the work done. Do you know of any references/websites that I can check out on how to determine a fair value of estimate of the work?
Thanks!
We have a donor who will provide some very high dollar equipment for a two-month period. I maintain that the rental value should be counted as an in-kind donation, My accounting folks disagree.
Certainly this should be counted just as the ‘rental’ value of a room at a hotel for the weekend that is donated, shouldn’t it?
Thanks for the help
In this case the Accounting folks may be right. You cannot make a contribution of the use of personal property. A common example of this is the donation of a timeshare as an auction prize. A nice gesture but since it is the use of personal property there is no contribution.
If the donor rents equipment as a business and is giving you cheap / free rent for a few months then it would be a contribution. You could still track it as an in-kind, non-GAAP contribution and expense on you books and talk about the value in your program descriptions and reports though.
Our organization gave a portion of rented building space for temporary use for another nonprofit entity. It is the first in my expense in trying to account for giving (instead of receiving) an in-kind and I’m unsure how best to record it. Obviously we’ve given up use for a portion of our own rented space, but what is the best entry to record this gift of space given by our organization?
Typo: “it is the first in my EXPERIENCEin trying to account…”
A donor provides a gift that was independently appraised and valued and substantiated at $15,000. The gift was to be used by the charity in a raffle, a live or a silent auction. The charity can also use this donation as a gift for the honoree.
How does the charity record and value the contribution in the event report for each of the following scenarios:
1) The gift was used in a raffle and $10,000 was raised
2)The gift was used in a silent auction and $12,000 was raised
3)The gift was sold in a live auction and $15,000 was raised
4)The gift was given to the honoree and no dollars were raised.
what can the donor take as a deduction in each of the scenarios?
I have donations to a food pantry that are then given away for free. Can i justify off balance sheet since the cans come in and then just go out?
Do we need to report/record the inkind gift for the year it is received and the inkind giving credit is given to the donor? Our situation is that some items donated for a silent auction did not sell at this fiscal year’s auction and will be held over for next year’s auction. The givers want to have inkind giving receipts dated for this year. Are we, as a non-profit, required to record their giving for this year when it will benefit next year’s auction? Can we give the donors the inkind giving receipts dated for this year because they gave their donation this year and then record their donation on next fiscal year’s books or do we legally need to date their inkind giving receipts for next year after next year’s silent auction when the items will hopefully be successfully auctioned off?
Wow TC! This message so moved and inspired me! It was meant for me and I accept it and claim it as mine through the love and faithfulness of our wonderful Lord and Savior!
I work for a non-for profit sporting organisation and we have had a debtor invoice ($15k) outstanding for some time now (FY2010). Rather than settle the invoice, we have been offered an in-kind settlement. I don’t expect the settlement to take place until sometime next year. How do I treat this?
In your initial example, you don’t say whether you give the auction payor any receipt for a “gift”. We print the “fair value” of a gift in our auction program, so for the jewelry you refer to, the FMV would be $3000. The original receipt, with the donated item description, goes to the donor. But at the event auction to follow, another patron knowingly overpays for that auction item by $2000 in order to generate more revenue for the non-profit. I see the incremental amount as a cash donation to be receipted to the auction buyer — and I have seen donors knowingly overpay more than $10,000 on items with a face value of $2000, so this is a critical matter for us to get right.