With non profit organizations running on the smell of an oily rag, budgets are always tight - and raising funds is always a priority.
If your organization struggles to raise cash donations, there’s another easy way to make your money go further – by reducing your expenses. No, we don’t mean cutting back on essential things you need to support your program, we mean seeking in-kind donations of goods and services, so you don’t have to pay for them!
In this article, we’ll explain more on what is an in kind donation, who can accept in kind donations and the pros and cons. We’ll also cover how to report and record in kind donations in your accounts.
What are examples of in-kind services?
A kids’ sports charity that runs sports clinics for disadvantaged youth will no doubt spend a lot of money purchasing sporting goods and equipment. In fact, it could be their biggest expense. However, seeking those goods as in kind donations - whether it’s from local shops, the community or large retailers - would save them a lot of money that could then be spent on increasing their impact. These non-cash gifts are considered in kind donations.
Similarly, a charity or non profit such as Habitat for Humanity that builds homes for vulnerable people requires a lot of physical resources and expertise for its volunteer projects. By sourcing these resources (such as the timber, plumbing, concrete and fittings) as in-kind donations, they are able to significantly reduce expenses on each project.
When it comes to fundraising, it’s important to remember that in-kind donations can be just as useful as cash donations.
What qualifies as an in-kind donation?
In-kind donations are anything that’s donated to a nonprofit, other than cash. They can be donated by an individual, other nonprofit organizations, or companies. Goods can be brand new or used, or even loaned. Normally, in-kind donations fall under two categories:
Goods: Equipment, books, cars, clothing, office equipment, furniture, food and supplies.
Services: Legal help, accounting services, IT work, advertising space, patents, royalties and copyrights, rent-free space, or other professional services.
Pros of in-kind donations
In-kind donations allow nonprofits to utilize goods and services that they would otherwise have to pay for, or that would be simply unaffordable. There can be many pros to in-kind donations.
- An effective way to reach new supporters
- A method of building strong partnerships with businesses
- Reduce expenses
- Reduce waste, as businesses may donate old stock or goods they can’t sell
- A simpler way for businesses to give because they don’t have to worry about their cash flow
- A cost-effective donation method for businesses, as they often pay less for goods, so can afford to donate more in goods than they could in cash
Cons of in-kind donations
Sometimes you may receive an in kind donation that’s a little like an unwanted Christmas present. While you smile and say thank you, deep down you’re thinking, erghh, what I am going to do with this now? While the giver has the best of intentions, there are some cons to in kind donations.
- You may receive donations you simply can’t use
- You may get stock that is old, out of date, or not usable for your organization
- You may need to pay to dispose of it, or find another organization that will accept it
- Unsolicited donations require storage space
- It might cost more than the item is worth to restore it or repair it
- You might not want to seem ungrateful by saying no and ruining the relationship
The best way around this is by creating an in-kind donation gift acceptance policy. This way, you won’t seem ungrateful by saying no to in-kind donations as you can simply refer to your organization's policy.
What are in-kind donation gift acceptance policies?
A written in kind donation policy can help you manage your donors' expectations and help avoid any awkward discussions when asking for or receiving in kind gifts. The policy should be posted on your website, available in hard copy in your office, and sent to any potential partners.
A gift acceptance policy should include:
- Specific information regarding the types of donations that are and are not accepted
- A description of who can make in-kind donations
- Maximum donation amounts, either quantity or value
- Information about what kind of gifts are only accepted after a review (your own, or legal counsel)
- How donations will be recognized
- Details about how gifts are evaluated and how unacceptable gifts are handled
- Whether gifts can be given anonymously
- A stipulation that once donated, donors do not get to dictate how something is used
- Forms donors need to fill out to make a donation
If you need some help getting started, here is a sample Gift Acceptance Policy document from Habitat for Humanity.
How to record an in kind donation?
Under Generally Accepted Accounting Principles (GAAP), all donations, whether cash gifts or in kind donations, should be recorded as revenue upon receipt.
It’s a good idea to create a standard form to record a detailed description of the gift, the date the gift was received, the donor’s contact information, the estimated fair market value of the gift, and how the value was determined.
You should also create a standard gift acknowledgment receipt to provide to donors, so they can claim a tax deduction. You may want to combine this with a thank you letter to show your appreciation. The receipt should include your organization's name and charity details, donor name, description of the donation, and a statement that no goods or services were provided by the organization in return for the contribution. The value should be left to the donor to complete.
All in kind donations, both goods and services, need to be recorded in your financial records as both revenue and expenses.
For example, if a designer donates $2000 worth of services, your records would show:
- Debit in kind revenue $2000
- Credit in kind revenue $2000
Not only is this standard financial practice, it will also help with your expenses estimates for next year. With the item in your expenses column, you’ll know if you don’t receive the same donation again, you will need to pay for it with cash instead.
Can you write off an in-kind donation?
Yes, donors can generally write off in kind donations as tax deductions. The donations must meet certain criteria in the US:
- The donor must receive a written acknowledgement/receipt from the nonprofit to substantiate the gift
- The IRS allows you to deduct the fair market value of property donated
- Only donations to registered 501(c)(3) nonprofits are eligible for a deduction
- Expenses incurred by providing service are also tax-deductible
- The donor must receive a written acknowledgement from the nonprofit to substantiate the gift.
- Any gifts over US$14,000 are considered taxable, and the giver of the donation is required to pay what is known as a gift tax.
To determine the fair market value of a product, simply work out what it would have cost to buy or produce the item.
For services, ask the provider what their typical hourly rate is or what the normal rate for a paid client is, and use that amount.
Make sure you speak to a qualified accountant for any specific advice related to your organization.
What is an in kind donation letter?
In kind donation letters are a popular fundraising tool used to reach prospective donors and ask for donations. They can be especially effective when you have a specific campaign, fundraising event or new program launching that requires specific items.
The content of the letter should make the reader want to donate. Think about what stories or statistics you can include that really highlight the great work you do, then clearly explain what you are accepting, how the in-kind donations will be used for, and how many people it will help. Finish with a clear call to action and information on how to donate.
Send the letter to local companies, both large and small, previous donors, and board members and their associates. Don’t forget to post your requests on social media, your website and in the media too. You never know who might have just the right connection to help.
Read our latest blog on How to write a donation request letter with 6 sample letters you can use.
Conclusion
In-kind donations are a great way to stretch your resources and meet your needs. They give donors another way to give when cash might be tight. Individuals are often more willing to donate goods, rather than cash, as they know how it will be used. This can help strengthen community connections and increase your impact.
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