Part III – In-Kind Donations – Documentation and Reporting
Requirements - You just found out that a donor has named your charity as the recipient of new laptops for the entire office. Great news! However, do you know what information should be included in the donor receipt as well as how to record the donation in the organization’s accounting records? A board member just found out from a colleague that the out-of-pocket costs he has been incurring during the year for parking and meals related to the board meetings are deductible as a charitable contribution. Do you know the proper documentation to provide him so he can claim the deduction on his personal tax return?
In-kind donations cover any donation a charity receives other than cash. When a charity receives an in- kind donation, the charity should never include a value of the in-kind item received in its donor acknowledgement receipt to the donor. The donor is responsible for obtaining a proper valuation for in- kind contributions. If the IRS later disagrees with the amount of the charitable deduction taken by the donor, the donor must support the amount. Only in the case of cash donations must the charity include the value of the donation received.
Donated Services and Out-of-Pocket Expenses - Donated services are not eligible for a charitable deduction by the donor. However, unreimbursed out-of-pocket expenses incurred while rendering services to a charity are eligible for a charitable deduction. If a volunteer claims $250 or more in out-of- pocket expenses from a single charitable activity, the volunteer must have a receipt from the charity in order to substantiate the deduction. The receipt should include a description of the services provided, including the dates of the volunteer service, and a statement whether any goods or services were provided in exchange for the volunteer service. It is not required to include the cost of the out of pocket expenses incurred by the volunteer. The volunteer must keep original receipts to document the deductible expenses.
Types of out-of-pocket expenses eligible for a charitable deduction include, but are not limited to:
- Transportation costs (mileage, parking, tolls, airfare, etc.);
- Meals and lodging;
- Supplies; and
- Cost of clothing required to be worn while performing charitable activities if the clothing is not suitable for any other personal use.
Mileage is allowed to be deducted at 14 cents per mile in lieu of actual automobile expenses incurred. This rate is not adjusted annually for inflation the way business use mileage rates are. Depreciation, general maintenance, repairs and general costs associated with equipment ownership which is used for a charity’s benefit are not considered a charitable donation.
In regards to airfare, meals and other costs incurred while away from home, there cannot be a significant element of personal pleasure or recreation in the traveling in order to qualify as a charitable donation. If a board member attends a conference in New York City on behalf of the charity and paid for his own airline ticket, he would be eligible to claim this as a charitable deduction on his personal income tax return. If the conference was on Thursday but the board member stayed in New York until Monday to visit friends and family, the board member would be unable to take the cost of the flight as a charitable deduction since the trip involved a significant amount of personal pleasure.
Auction Items - Some of the most common in-kind donations received by charities include the receipt of auction items. As with all in-kind donations, charities should include a description of the items received but not the value of the donated items on the donor acknowledgement letter. For bookkeeping purposes, it can be administratively burdensome to record each auction item as a charitable donation with an offset to inventory, only to reverse the inventory entry a few weeks later to record the sale of the item at the fundraising event. This list of auction items is usually kept by the development staff for use in the auction catalog. This information is rarely included as part of a charity’s revenues and expenses on the financials.
For tax return purposes, the value of these auction items must be reported as contributions as well as an offsetting special event expense on the annual Form 990. This allows for the tax return to reflect all the donations that were received by the charity and report an accurate picture to the public of the charity’s fundraising activities. Even though the charity is not the end user of the donated items, when the items are received, they are an in-kind donation the charity will use to generate additional revenue. Donated items are the “inventory” used in the auction and therefore must be captured on the tax return. Thus it is important to retain the detailed information about in-kind donations to the auction from the development staff for your records and support when preparing the IRS Form 990.
Organizations should be cautious when receiving donated “right to use” auction items. If a donor contributes a week at a vacation home they own, a hotel donates overnight vouchers, or an airline donates airline ticket vouchers, these are all non-deductible contributions by the donor. These contributions are not deductible because the gift is incomplete. The donor owns the underlying asset and is only donating the right to use the asset, not the entire asset. Alternatively, if a donor purchases a week at a cabin they do not own, a hotel night or an airline ticket, generally they will be entitled to a charitable contribution deduction. As cautioned above, the charity should be careful to only describe the donated item in detail and advise the donor to consult their own tax advisor as to the deductibility of the contribution.
Securities - Marketable securities are also a common in-kind donation received by a charity. Charities should be cautious of accepting marketable securities from donors and verifying whether or not there are any restrictions for selling the securities. Some charities have a policy that upon receipt of donated securities, they are immediately sold. Other charities will hold the securities if it aligns with their investment portfolio. Charities should make their gift acceptance policy freely available to donors and make sure donors are familiar with any policies which could impact the acceptance of any in-kind contribution. In some instances, a donor may restrict the donation and require the charity to hold the securities for a certain time period. As with all donor-imposed restrictions, these restrictions should be discussed with a donor prior to accepting the contribution and documented in the donor acknowledgement letter since donor restrictions on disposal of the asset may affect the value of the gift.
When receiving marketable securities, the date of contribution to report on a donor receipt depends on how and when the stock certificate was received:
- If received in person with no conditions attached, use the date the stock certificate is delivered.
- If received via mail with proper endorsements to the charity, use the postmark date.
- If the stock certificate is delivered to a broker, bank or other transferring agent, the date which the stock is transferred out of the donor’s brokerage account and into the charity’s account is the date of contribution.
If a charity receives notification of a donor planning to make a stock donation, the charity should notify its broker to expect the transfer and follow up with the donor if the transfer does not happen in the expected time-frame. A delay in the receipt of the stock by the charity may indicate a problem with the transfer. If the donor expects the date of donation to be on a specific date when the security has a certain value but the value of the security, and consequently the value of the contribution, drops due to a delay that is perceived to be the charity’s fault, the donor may be unhappy with the charity. With the volatile securities markets, it is best practice for charities to monitor security donations carefully and keep the lines of communication with donors open in order to manage expectations.
Recommendations - Because of the unforeseen implications in-kind donations can have on charities, it is highly recommended that charities have a written gift acceptance policy. The policy should include any conditions on types of gifts accepted, whether gifts are subject to the approval of a committee or the organization’s board, what the charity should do when it is offered a restricted gift, and whether it has any policies related to holding certain types of gifts (marketable securities, real estate, etc.). Charities are often eager to receive contributions but often do not realize the additional reporting requirements that may be involved with the receipt of non-cash gifts. Therefore, having a well-circulated gift acceptance policy in place and following it regularly will minimize the risk for the charity.