In-Kind Donations: 4 Things 501(c)(3) Nonprofit Organizations and the Donor Need to Know
Whether you are cleaning out your closet or getting rid of old furniture, you should consider donating it to a nonprofit organization in need of these items. In-kind donations are valuable to both the 501(c)(3) nonprofit and the donor. A 501(c)(3) nonprofit organization may record the in-kind donation as revenue while a donor of an in-kind contribution may take a tax deduction on their federal income tax.
What is an in-kind donation?
An in-kind donation is a donation of a good or service instead of cash. These donations can be tangible such as:
Clothing;
Furniture;
Books;
Toys; and
Supplies.
These donations can also be intangible like someone helping the organization in advertising efforts, free of charge. Donors of in-kind contributions may only deduct for a good or tangible donation. In other words, one cannot deduct the value of time or a service.
How do I claim the donation as revenue or as a charitable donation?
In order for a 501(c)(3) nonprofit organization to record the in-kind donation as revenue and the donor to claim it as a charitable contribution, one must determine the fair market value of the good donated.
Under IRC 170(a)(1), individuals and corporations can deduct charitable contributions. The amount of the deduction is generally the fair market value of the donated property at the time of the donation. [1]
When a nonprofit organization receives an in-kind donation, it records the goods as revenue. To determine the amount of revenue, the organization must value the in-kind donation at its fair market value on the date the donation was received. By law, however, the charity itself cannot make value determinations on donated goods. [2] The responsibility is on the donor to determine fair market value for both the 501(c)(3) nonprofit and the donor themselves.
How do I determine the Fair Market Value?
Fair market value is the price that the property would sell for on the open market. There is no formula to determine this, but instead, the donor must consider the desirability of the property, its use, and scarcity.
As a general rule, the fair market value of household goods, such as furniture, appliances, and linens, are usually much lower than the price paid when new. Such used property may have little or no market value because of its worn condition. The item may also be out of style or no longer useful. Thus, when donating these types of goods to a nonprofit organization, it’s important that they are in good used condition or better.
If the donor does not wish to determine the fair market value by themselves, the donor can consult a local tax advisor who should be familiar with market values in the region. The IRS also provides tax guidelines to help in determining fair market value.
Additionally, if the donor wants to claim a charitable deduction of a donation over $500, the donor must fill out Form 8283 with the IRS.
Recording In-kind Donations
As a whole, the in-kind contribution should be acknowledged by the 501(c)(3) nonprofit organization. And, in order for the donor to be able to claim the donation as a charitable contribution, the donor must provide some form of written document that includes the cost or fair market value of the donation.
The easiest way to do this is if the charity creates an in-kind donation form that donors may complete. The form should include the estimated fair market value of the donation, the date the good was received, and a short description of the donation. This document will benefit both the nonprofit organization, for revenue purposes, and the donor, for tax deduction purposes.
Disclaimer
As always, this post is for informational purposes only. Contact a licensed attorney if you have any questions regarding in-kind donations.
Sources
[1] I.R.C. § 1.170A-1(c)(1) (2003).
[2] Id.
