Schedule M, Noncash Contributions and Gifts-in-Kind Valuations
July 2, 2014
Noncash contributions
Noncash contributions, also often known as gifts-in-kind (or in-kind donations), is a type of charitable giving in which goods and services are provided to a tax-exempt organization in lieu of donating money. Often times, these donated goods and services are items that the organization would have had to purchase had the items not been donated. Examples of in-kind gifts include food, clothing, medicine, equipment and various services. Prior to determining the value of the donation an organization needs to determine if the item may be used in carrying out their mission. If an organization determines that the items cannot be used or sold, then the organization should treat the transaction as if it did not occur and not account for the donation.
Many tax-exempt organizations, especially foundations, are dependent on the support which is donated to the organization during the year. While cash contributions are typically a large part of the support these organizations receive, gifts-in-kind are also frequently contributed. With the increase in the amount of in-kind gift donations many tax-exempt organizations are receiving, questions regarding the valuation and “worth” of these types of gifts are on the rise.
Valuation/Measurement of Gifts-in-Kind
Tax-exempt organizations are typically required to use fair market value to measure gift-in-kind contributions. Fair value is defined in FASB ASC Topic 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
In order to determine the fair market value, the organization must identify the “principal exit market,” which is the market in which the organization could sell the asset or transfer the liability. Additionally, the organization must recognize that the donor’s market and the principal exit market of the tax-exempt organization are not the same. Therefore, generally donor provided values are not the same as fair market value.
Lastly, the organization must consider any legal restrictions that may be placed on the gift-in-kind, which will likely impact the determination of potential market participants and, therefore, would affect fair market valuation. This is imperative as this will allow the organization to determine if accepting the gift will be advantageous for them.
For income tax purposes, tax-exempt organizations cannot provide a donor with the assigned value of a gift-in-kind. If applicable, a valuation relative to the fair market value of the donated item needs to be prepared by a professional. This is the responsibility of the donor and not the organization. In acknowledging the donation, an organization should include a description of the donated item and may also want to include the practical value or benefit, to the organization.
CONCLUSION
Contributions, either cash or noncash, are often large sources of revenue for tax-exempt organizations. It is important that organizations understand the effects of accepting these gifts. Tax-exempt organizations should have a policy for assessing gifts-in-kind prior to their acceptance of them. It is also important to note that prior to the acceptance of any gifts-in-kind the organization should determine that such item can be used in carrying out their charitable mission.
Organizations should also educate their employees regarding acceptance of gifts-in-kind by training them to understand the nature of the items that are received as well the donor’s intent for the gift-in-kind. Having this understanding is critical to correct financial reporting. Lastly, costs versus benefits must be considered. If the cost of obtaining a valuation of a gift-in-kind is greater than the value of receiving the gift in the first place, then perhaps the gift is not worth accepting.
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