What is an In-Kind Donation? (+ How Nonprofits Can Manage Them)
Ever thought to yourself, “What is an in-kind donation?”
Or maybe you’re considering different fundraising revenue sources and find it challenging to figure out how in-kind donations could fit in.
Well, this article answers questions you might have about in-kind donations for nonprofit organizations.
Here’s what we’ll be discussing:
What is an In-Kind Donation?
Essentially, an in-kind donation is a non-cash gift given to a nonprofit or qualified donee. In-kind donations can be in the form of a good or service.
For example, let’s say a community center was running low on chairs and a local carpenter decided to donate some furniture to help out. Because no cash traded hands, this would be considered an in-kind donation.
Like P. Diddy, In-kind donations have been referred to by many names: gifts-in-kind, donations-in-kind, and non-cash gifts. For this article, these terms will be used interchangeably. Pick your favorite!
Pretty simple right? Well, not quite.
Although in-kind donations may seem simplistic and easy to understand, various scenarios complicate the in-kind donation process. Before we get to those scenarios, let’s talk about the pros and cons.
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What are the Pros and Cons of In-Kind Donations for Nonprofits?
In many situations, in-kind donations can present a mutually beneficial arrangement between donors and donees. However, there are scenarios in which in-kind donations can create problems for those who receive them.
First, let’s discuss the benefits of in-kind donations:
3 Benefits of In-Kind Donations
1. Waste reduction
One person’s trash is another person’s treasure. This phrase is true in this case. An in-kind donation can be a mutually beneficial transaction in which a donor gifts an item they may have an excess of or no use for. However, the recipient of the donation may be in dire need of that item.
This works out nicely for both parties involved, and a third party: the earth! It’s much better to give away something to someone who needs it rather than have it end up in your local dump. Reduce, reuse, recycle.
2. Philanthropic Efficiency
Giving away something that has already been bought or made is a hassle-free way to help out. To demonstrate this, let’s go back to our carpenter example. If the carpenter donated $200 to the community center instead of donating his chairs, the center’s staff would still have to process the donation and go buy chairs. In this example, a cash gift would create more work for the center. In many cases like this, it’s more efficient for nonprofits to receive the items they need directly.
3. Corporate Philanthropy Opportunities
Companies have lots of stuff. They are constantly buying, selling, and trading commodities; it’s what they do best. As a result, they are often left with excess goods, such as the goods they produce, office supplies, or even office space.
With this excess comes an opportunity to advance their Corporate Social Responsibility (CSR) agenda. Many companies have a philanthropic target that they have to reach every year, and giving away some of their extra resources is an efficient way to do so. Later, we’ll discuss different strategies to solicit in-kind donations from companies.
3 Challenges with In-kind Donations
Next, let’s unpack some of the situations to avoid when considering an in-kind donation.
1. Donations of Unnecessary Items
Sometimes, one person’s trash is every person’s trash. Donors need to ensure that they are not prioritizing their need to get rid of something over the actual needs of their recipients or nonprofits’ beneficiaries.
It’s crucial for donors to fully understand the needs of their recipients before donating an in-kind gift, or they can actually cause their recipients harm. Thoughtless in-kind donations can create several problems: inappropriate inflation of revenue, additional reporting work, or headaches over where to store the item.
2. Shipping costs
What if our good friend, the carpenter, shipped each chair to the community center? If it costs $200 total to ship five chairs to the center, the shipping would be nearly as expensive as the supplies and labor it took to make the chairs. This would negate the value of the donation. In many cases, it could be more cost effective to sell the item and give the recipient the proceeds.
3. Local economic disruption
This will only occur in extreme circumstances, but it’s worth mentioning. In many situations, such as foreign aid or disaster relief, companies from the global north may assist communities in the global south by sending items they may need (e.g., drinking water, food, temporary housing, etc.).
However, those from the global north may put companies and vendors in those globally south communities out of business by driving down the price of the goods they are donating.
Think about it: why would you buy a water bottle from a food stand when you can get one for free? Although this problem does not apply to every situation, donors need to consider the unique needs of the communities they are donating to.
What unites the possible disadvantages of in-kind donations is a lack of conscientiousness. All donors must be conscious of the unique needs of the individuals they are helping, the dynamics of the communities they are helping, and the costs associated with shipping and managing the gift they are giving.
How Nonprofits Can Ask for In-Kind Donations
When it comes to soliciting the right types of in-kind donations, nonprofits need to identify their needs, develop a gift acceptance policy, ask their stakeholders, and then ask their wider community.
Here is more information on how to ask for in-kind donations.
1. Identify your needs
Think about everything in your organization that presents a problem and what goods or services could fix that problem. For example, you may have a leaky roof at your office that could use a contractor’s work.
Next, think about your programmatic needs.
- Do you need after-school snacks for a tutoring program? These could be in-kind donations from your local grocery store!
- Do you need personal protective equipment for front-line workers? Ask a supply depot near you to donate!
- Do you need high-grade Golden Oak wood polish for your antique toy museum? Check your local hardware store!
If your answer is “yes” to any of these questions, or questions like these, note it for when you’re soliciting gifts.
2. Develop a gift acceptance policy
Having rules about what you will and won’t accept is a great way to set the parameters for your in-kind fundraising.
A gift acceptance policy will make it clear to fundraisers and donors what they should focus on. Check out the National Council of Nonprofits gift acceptance policies overview to find resources on crafting a clear and helpful policy.
Here’s a tip: If you have many gifts that don’t relate directly to your programs, consider hosting an auction.
3. Ask your stakeholders
Those closely connected to your organization will be your best bet for an in-kind donation or introduction to someone who can help you out. Let your board members, staff, and volunteers know the items that you need so they can help you out.
Does your office have a broken window? Even if no one within your organization can help with the repair, a volunteer may know someone whose sister used to go to college with a guy who owns a window repair shop. Your social circle is bigger than you think.
4. Ask your community
After you’ve asked your closest supporters, reach out to businesses and individuals within your community. Again, local businesses will be your best bet for receiving in-kind donations. They have so much stuff!
When researching businesses online, note any companies that have corporate giving or sponsorship programs. If a business already has a philanthropic framework, it will be much easier to solicit donations from it. Remember, the more businesses you ask for, the more likely you will be successful.
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In general, soliciting in-kind donations won’t be very different from soliciting cash gifts. However, what you will need to make crystal clear is the impact that the gift will have. It’s much easier to think of cash as a way to solve organizational problems rather than a physical object.
How to Calculate the Value of an In-Kind Donation
The value of an in-kind donation is a crucial factor to determine in any non-cash transaction. Donors want to know how much of their contribution is tax-deductible, and nonprofits need to know how much income the contribution represents.
Each country has different regulations regarding the evaluation of donations. Let’s take a closer look at what the deal is in the US and Canada.
How to Calculate In-kind Donations in the United States
In-kind donations must be assigned a Fair Market Value (FMV).
The IRS defines Fair Market Value as “The price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts”.
Even though this may sound simple, determining fair market value can be tricky.
However, let’s say that you are donating some extra chairs from your home. Statistically speaking, you are probably not a carpenter and have no idea what the exact cost of a used chair is. Unfortunately, there is no single formula that can help you appraise the value of your chairs.
4 Ways To Determine Fair Market Value in the US
Americans have four ways to determine FMV.
1. Cost or selling price
The cost of an item that the donor originally incurred to acquire the item may be the best way to determine FMV. Additionally, if the donor can provide that item’s actual selling price, the FMV can be determined easily. However, the original sale must have taken place close to the evaluation date, so this won’t work for our used chairs scenario.
2. Sale of comparable items
Sales prices of items similar to the donated item are important in determining the FMV. The donor must keep in mind the degree of similarity between the property sold and the donated property. It is best to ensure that the donated property and the sold property are sold around the same time and under similar conditions.
3. Replacement Cost
The cost of buying, building, or manufacturing items similar to the donated item should be considered. The replacement cost is the amount it would cost to replace the donated item on the date FMV is determined.
As there must be a reasonable relationship between replacement cost and FMV, replacement cost rarely factors into fair market evaluations. If the supply of the donated property is more or less than the demand for it, which is often the case, the replacement cost becomes less important.
4. Expert Appraisals
This method is mandatory when a donor wants to claim a deduction of $5000 or more. There are a few factors that must be considered when receiving an appraisal.
First, the appraiser must be adequately qualified and have previously demonstrated knowledge of the donated property. Second, the appraiser must consider all factors of the item when making an appraisal.
Finally, the appraiser must support their opinion with known facts such as purchase price or previous comparable sales. Keep in mind that the appraiser’s opinion is no more valid than the facts on which it is based; without the relevant facts, it is simply a guess.
Deductions: Be Aware!
Several deductions can occur during a fair market evaluation which can decrease the total value. This is the case when donating property, intellectual property, used household items, and several other items. Please visit the IRS website for more information on deductions.
So, where does this leave you when trying to determine the value of your used chairs? It may be worth heading down to a local used goods store to see what similar items are selling for. As the price you originally bought the chairs for is likely no longer relevant, it would be best to find the most similar item you can that was sold recently.
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How to Calculate In-kind Donations in Canada
Similarly to Americans, Canadians describe FMV as, “The highest price, expressed in dollars, that property would bring in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.”
However, the CRA makes it a bit lenient on donors and organizations when determining fair market value. Generally, if the FMV of the item is less than $1,000, any individual who is competent and qualified to evaluate the particular property being donated may determine its value.
If the fair market value is expected to be more than $1,000, the CRA recommends that a third party professionally appraise the property. If the item is appraised, the name and address of the appraiser must be included on the donation receipt.
Deemed Fair Market Value Rule
One hitch to keep in mind is that under certain conditions, a receipt issued for a non-cash donation must be issued for the lesser of the donation’s fair market value if multiple values exist.
For all in-kind donations made to registered charities after December 5, 2003, there are a few conditions to keep in mind:
- The donor initially acquired the donated item as part of a tax shelter arrangement
- The item was acquired less than three years before the time of the donation
- The item was acquired less than ten years before the time of donation, with one of the main purposes being to gift the property to a qualified donee.
If these conditions are met, donors must only claim the amount that they originally purchased the item for.
For example, let’s say that you bought a chair two years ago for $50 and it suddenly became considered an antique worth $500. If you donate that chair to a nonprofit in Canada, the organization can only issue a receipt of $50.
This is because the donation is being made after December 5, 2003, and because the item is being acquired less than three years before the time of the donation.
How to Record In-Kind Donations
To quickly answer a common question, yes, in-kind donations do count as revenue for your organization.
The process of recording an in-kind donation is quite simple. First, record the donation as revenue, assigning it the FMV that it warrants. Next, record the item as an asset; if the item will provide a financial benefit in the future, or record the item as an expense; if the item will not present significant financial value in the future.
Spreadsheets and financial statements tell a story about how assets are acquired and spent by the organization. Properly recording in-kind donations communicates to your stakeholders that the item was donated (revenue) and that the donation is in use (asset) or was used (expense).
How to Recognize In-kind Donations
The first thing that you should do to recognize a donation is to send a donation receipt and confirmation email to the donor, acknowledging that the financial transaction of the donation has been processed. It is good to show donors that their contribution has been processed in a timely fashion.
We recommend that you make a habit of sending a receipt to the donor as soon as possible. Donors value this level of accountability. Use Keela to automate the donation receipt process to save time, whether you issue receipts immediately or at the end of the year.
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Next, you need to say “thank you”. The key to a perfect in-kind donation thank you letter is its specificity. By nature, in-kind donations are specific. Unlike cash donations, even restricted ones, in-kind donations are extremely limited in their value to the organization.
If someone donates hmmm I don’t know. . . a chair, you should show gratitude by specifically explaining how those chairs will positively impact your organization.
Maybe your community center will have more places to sit for the elderly. Maybe your psychiatry clinic will have more comfortable seating for clients. Maybe your day camp’s games of musical chairs will last longer. Whatever the case may be, explain just how impactful your donors’ contributions are.
As you know by now, in-kind donations come with their own set of benefits, drawbacks, rules, and strategies. Before you finish reading, let’s recap with a few key points to keep in mind.
First, please research and follow your regional regulations regarding in-kind donations. Your taxation agency, whether it be the IRS or the CRA, will be able to provide you with a clear understanding of exactly what to do.
Second, identify your organizational needs and be clear about them. This will provide you with direction regarding what you will actively solicit and what you will not accept. The last thing you need is someone dropping off an unsolicited bag of hand-me-down clothes at your doorstep.
Third, be specific about your gratitude. Tell donors exactly how their item will be used and how it will positively impact your organization and advance your mission.
Fourth, have fun! You read too much today to not have a little fun.
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