Our Ask An Expert series features real questions answered by Claire Axelrad, J.D., CFRE, our very own Fundraising Coach, also known as Charity Clairity.
Today’s question comes from a fundraiser who wants advice on best practices around recording and recognizing in-kind donors.
Dear Charity Clairity,
We often receive gifts in kind which are worth a lot of money. Some examples include technology upgrades and person hours or large items donated for our live auction which make us thousands of dollars in the auction for each item. How do we record, recognize, and be sure not to forget about these donors as we list our donors from the year in their circles or their donor lists by amount? What is the best practice in this type of situation?
— Want to be kind to in-kind
Dear Want to be kind to in-kind,
You are right to consider all donors when thinking about your gratitude, recognition and cultivation strategies. The form of the gift is not what’s important. You certainly wouldn‘t consider distinguishing between cash and stock donors when it comes to ongoing stewardship. Right?
If a friend gives you a birthday gift from their personal collection, because they know you’ve admired it or need it, you’re going to be just as delighted and grateful as if they went out and purchased the same item on your behalf. Or gave you the money to purchase it. The impact is the same.
When it comes to recognizing in-kind gifts and donors, what matters is:
- The impact the gift has on your mission.
- How the donor feels about having made the gift.
- How likely it is the donor will make subsequent in-kind gifts.
These things especially matter with in-kind donations that save you money you would otherwise have spent in the normal course of business. Like the technology upgrades and professional services you mention.
It’s not so much the case with smaller gifts you wouldn’t have otherwise purchased. Like the guitarist who donates their services for an event where you wouldn’t otherwise have hired a musician. Or an expired gift card. Or discounted tickets for your employees.
So… how do you record and recognize in-kind gifts, especially the significant ones? And how do you make sure you include these donors in your ongoing communications and donor cultivation touchpoints?
Recording may differ for the finance and development departments.
If your nonprofit prepares its financial statements in accordance with Generally Accepted Accounting Principles (GAAP), then in-kind donations are considered “non-financial gifts” and should be entered in both the expense and revenue sides of the ledger. In other words, they are required to be entered differently than cash or cash equivalent gifts (note that requirements were updated late in 2020). And there is a distinction between gifts of product and gifts of services. In-kind gifts must also be recorded at “fair market value” (FMV) per Financial Accounting Standards Board (FASB) rules, which can be tricky. So it’s good to leave this to your professional finance staff or accountant.
Organizations subject to an annual audit by an independent accountant must also meet the GAAP standards; some may be required to do this by state law, or the terms and conditions set by a lender, grantor, or other key constituent. Even if you just file a form 990, and aren’t subject to GAAP, it’s useful to follow their recommendations from the perspective of internal management, control and planning.
NOTE: while the finance department will estimate a fair market value for accounting purposes, development should merely record the property description and leave it to the donor to estimate the gift’s FMV for their own tax purposes.
1. Entering the gift
How you enter in-kind gifts in your donor database will somewhat depend on how your CRM is set up. So familiarize yourself with best practices. This is why you purchased ‘support,’ so talk to your provider. Generally you’ll want to code these gifts so you can distinguish them from financial gifts. This will assure you don’t get into the business of valuing the donations. But if you sold the donation at auction, or have an independent appraisal, that establishes a FMV you can enter into the donor record. The most important thing is to assure everyone who enters a gift knows your rules and adheres to them consistently. You’ll want to enter a description, sale or appraised value or a guestimated value (based on what you’d have had to expend) in fields that enable you to pull reports for recognition and cultivation purposes. Here is advice from several providers to give you a general idea:
- Bloomerang: YouTube video with instructions for coding gifts as “in-kind” in the “Fund” field and entering a gift value of $0. You can then select either “good” or “service” and type the estimated value in the FMV field.
- E-Tapestry: Suggestions for entering gifts with and without received amounts.
- Little Green Light: Suggests assigning the gift type as “in kind” and recording a tax-deductible amount of $0, unless you have a verified third-party appraisal or the donor provided documentation of the fair market value dollar amount.
2. Saying thank you for the gift
Your job is to thank promptly and personally, and provide information as to the powerful impact of the gift. Your job is not to place an explicit value on the donation; that’s for the donor to determine. You should be aware individual donors may receive a tax deduction for gifts of goods but not for donated time (refer to IRS Publication 561 for further details). This is not something I’d recommend including in your letter, but it’s good to know in case you get pushback from donors. Here is a simple example of an appropriate in-kind donor acknowledgment:
“Thank you for your generous contribution of [detailed description of goods/services], received by [name nonprofit] on ____ [date of receipt]. No goods or services were provided in exchange for your contribution. Your meaningful gift will allow us to [explain how the gift makes a difference, enacts their values, and moves your shared mission forward.]
With gifts that clearly serve as a substitute for products or services you would have otherwise had to purchase, you might go further and send a thank you like this:
“Per our understanding, IRS regulations will not allow you to declare the value of your donation from our acknowledgment. We can say we likely would have expended approximately $________ for [purpose of gift, but for your generosity. These are dollars saved which we are able to apply directly to support critical programs and services in our community.”
3. Recognizing and cultivating the donor
Most organizations list in-kind donors separately from monetary donors in their recognition listings. As much as you want to be kind, it’s not a kind thing to get your donor or your organization into legal hot water. That’s why, for development purposes, it remains a best practice to generally enter in-kind gifts in the donor’s record as property and service descriptions; not dollar amounts. The fact your donor tells you their legal services are worth $50,000 does not mean the IRS will agree.
But definitely list them! And, in so doing, think from your donor’s perspective. (See some examples here). What will they expect? If it’s reasonable, it doesn’t cost you anything to acknowledge their generosity. If you want to generally guestimate the value of the gift, and list by tiers, it’s okay to do so; just don’t publicly assign dollar amounts to the levels. For this reason, I like to create completely separate donor categories for in-kind donors, with different names (e.g. Gold, Silver, Bronze for in-kind vs. Founder, Patron, Benefactor for cash), so they don’t have to perfectly align with the dollar amounts you use for monetary donors. Alternatively, you can list these donors in your general individual or business donor categories with an asterisk. Then footnote the gift as “in-kind gift; donor-estimated, independently-appraised, or sale value.”
When running reports, be sure to add information to your query to select for in-kind gifts so you don’t inadvertently exclude these valuable supporters from your general recognition and cultivation strategies.
Hope this helps you be kind with in-kind!
— Charity Clairity
NOTE: This question is answered to the best of my understanding, and should not be construed as professional financial or legal advice. Always consult with your own professionals. You can also check out IRS regulations.
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