Your organization just found out it will receive a donation of new laptops for the office. Do you know what type of information to include in an acknowledgement? A board member just found out that the parking and meals he has been paying for on the nonprofit’s time may be deductible. What type of information should be on his tax receipt?
Generally a donor may deduct an in-kind (or, non-cash) donation as a charitable contribution. And a donor must obtain a written acknowledgement from the charity to substantiate the gift, although the acknowledgement will generally not assign a dollar value to the donation.
Not only are the written acknowledgement requirements complex, especially for non-cash donations, but noncompliance can be costly (generally $10 per contribution).
In-kind donations generally fall into one of three categories:
- Direct payment by a donor of bill owed by the charity to a third party.
- Donations of goods.
- Donations of services.
The charity should provide a written communication or acknowledgement to the donor. For a nonprofit, it is a best practice to send the donor a written acknowledgement that includes the name and EIN of the charity, as well as the date received and a detailed description of the in-kind contribution.
In order for a donor to claim a donation that exceeds $250 as a charitable contribution on his/her federal income tax return, a written acknowledgment must be in the donor’s possession and it should include a statement about whether the donor received any goods or services in exchange for the donation (and if so, the value of the goods or services received).
In addition, for direct donations the nonprofit should also provide a statement of the amount donated (i.e., the face value of the check, stock or the cash received).
But for in-kind donations, the responsibility is on the donor to value the donation. Nevertheless, the nonprofit may also desire to state something like “were it not for your donation, we would have had to expend $________ to procure such an item.” This can be helpful as a fundraising tool when making major donor lists, for example.
Easiest for the donor and the charity to document and verify are direct payments by a donor of an amount owed by the charity to a third party, such as what was paid to the laptop vendor in our above example. An organization should, of course, confirm with the vendor that the invoice was paid (and not somehow discounted and then paid) and receive written confirmation from the vendor. Once confirmed, the charity may provide a written donor acknowledgement.
But donations of goods are more complicated. The charity must still provide the written acknowledgement to the donor. The value of the donation is up to the donor, as described above, and if believed to be in excess of $5,000 in value is generally obtained from an IRS qualified appraisal.Further, if the charity sells or transfers the goods within three years of receiving, the charity must complete IRS Form 8282 (Donee Information Return) and file with the IRS.
Donations of services are more complicated still. Generally personal services are not deductible, however, the expenses associated with providing such services are. For example, if a business owner authorizes employees to use company time to provide services (such as an associate at a law firm), then payroll and associated costs are deductible, in addition to expenses directly related to the service. It is important for the donor to keep detailed records, such as of the parking and meal expenses in the opening example.
Again the nonprofit charity should provide a written acknowledgement to the donor. This particular acknowledgement should be substantially identical to the other acknowledgements, except that it should not contain a dollar amount for the costs or expenses. Instead it should provide a description of the services and the year of the services.IRS Publication 1771 (pdf) contains examples of appropriate written acknowledgements for non-cash gifts.
A “charitable contribution” is tax deductible for a donor if it is “to” or “for the use of” a charity. Staffers at charities who provide donors with the appropriate written acknowledgements should proceed with caution in acknowledging in-kind donations.
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