What expense category is In-Kind Contributions?

For nonprofit organizations, support often comes in forms other than cash. These in-kind contributions—donated goods like food or computers, and donated services like pro-bono legal work—are vital resources that allow nonprofits to stretch their budgets and amplify their impact.

While no cash changes hands, it is a critical accounting and compliance requirement for nonprofits to assign a monetary value to these donations and record them in their financial statements. 

This process, known as valuation and recognition, is governed by both Generally Accepted Accounting Principles (GAAP) and IRS reporting rules. This guide will explain how to categorize the value of in-kind contributions to ensure your organization's financial reporting is accurate and transparent.

In-Kind Contributions (Valuation and Recognition) Category

An in-kind contribution is unique in that it is not a cash expense. Instead, it is recognized on a nonprofit's financial statements as both revenue and an expense (or an asset). This net-zero transaction accurately reflects that the organization received value and then used that value to further its mission.

The expense side of the transaction is categorized based on its function, just like any other cost, for reporting on the Form 990:

• Program Expense: For donated goods or services used directly in your programs (e.g., food for a soup kitchen, legal services for clients).
• Administrative Expense: For goods or services that support general operations (e.g., donated office furniture).
• Fundraising Expense: For goods or services used in fundraising activities (e.g., donated items for a charity auction).

Important Considerations While Classifying In-Kind Contributions

The most critical factor is determining the Fair Market Value (FMV) of the donation and understanding the specific rules that distinguish the treatment of donated goods from donated services.

Valuing Donated Goods

A nonprofit must make a good-faith effort to determine the Fair Market Value of donated goods at the time of the contribution. As defined in IRS Publication 526, FMV is the price at which property would change hands between a willing buyer and a willing seller.

• For new items: This is typically the retail price.
• For used items: The value is what the item would sell for in a thrift or consignment shop. For example, the FMV of used clothing is usually far less than what was paid for it.
• For large quantities: The value is the price at which comparable numbers of the same item are being sold.

Valuing Donated Services

This is a key area of compliance. Under GAAP, you can only recognize the value of donated services if they meet one of two specific criteria:

1. The services create or enhance a non-financial asset (e.g., a carpenter volunteering to build a ramp).
2. The services require specialized skills, are provided by someone who possesses those skills, and would have been purchased if not donated (e.g., pro-bono legal or accounting work).

Volunteer time for general tasks, like answering phones or serving meals, is not recorded as revenue and expense in the financial statements, although it should be tracked for operational and reporting purposes.

Tax Implications and Recordkeeping

Properly valuing and reporting in-kind contributions is a major component of a nonprofit's annual IRS filing.

How to Report In-Kind Contributions

Nonprofit organizations report in-kind contributions on Form 990, Return of Organization Exempt From Income Tax.

• The total value of noncash (in-kind) contributions is reported on the Statement of Revenue (Part VIII).
• The corresponding expense is included in the Statement of Functional Expenses (Part IX), allocated to the appropriate program, management, or fundraising category.
• Schedule M, Noncash Contributions, must be filed if the organization received more than $25,000 in noncash contributions. This schedule requires a detailed breakdown of the types of property received (e.g., food, clothing, books).

Substantiation and Acknowledgment

As detailed in IRS Publication 1771, the nonprofit has a responsibility to provide donors with a written acknowledgment for their contributions. For in-kind gifts, the receipt must describe the donated item, but it should not state a value. The donor is solely responsible for determining the value of their donation for their own tax deduction purposes.

How Fyle Can Automate Expense Tracking for In-Kind Contributions

While Fyle is designed for cash expenses, it serves as an excellent system for documenting and tracking the information related to in-kind contributions, ensuring you have a complete audit trail.

• Create a Net-Zero Record: Document an in-kind donation by creating a zero-dollar expense in Fyle to serve as a placeholder for the record.
• Centralize Valuation Documents: Attach all valuation documents—such as appraisal reports, market value research, and photos of the donated goods—directly to the Fyle record.
• Track by Program or Fund: Code each in-kind donation record to the specific program or fund that benefited from it for accurate functional allocation.
• Automate Your Accounting: Fyle's integration with QuickBooks, Xero, and NetSuite allows your accountant to easily access the documentation needed to make the correct journal entries for in-kind revenue and expenses.