Many times a non-profit organization will receive donations of supplies, equipment, or services from an individual or a company. These contributions are considered an “in-kind” contribution by the Internal Revenue Service. The non-profit must properly record all in-kind contributions that it receives.
In-kind contributions are recorded as both income and expenses when they are received. Your non-profit organization should set up the categories required to allow you to record a transaction in accordance with Generally Accepted Accounting Principles and which allow you to track information required to prepare your tax return and to track and report on donor information.
Typically you will set up in-kind revenue and expense accounts which mirror the types of donations your organization receives. Most non-profit organizations generally receive donations of supplies, equipment, and professional services. Thus, you will want categories that track:
- Supplies In-Kind expense account(s)
- Equipment In-Kind expense account(s)
- Assets In-Kind fixed asset account(s)
- Service In-Kind expense account(s)
- A Donation In-Kind Revenue account
Donation of Supplies:
Let us look at some typical in-kind donations and see how we record these. We’ll start with the donation of $1,000 of supplies to your organization. The journal entry for this type of donation would be:
- Debit Supplies In-Kind Expense account for $1,000
- Credit Donation In-Kind revenue account $1,000
Note that if you want to track supplies for use internally separately from supplies that you use to support your operations, you will need to setup sub-accounts to track that detail. For example, let’s say that you receive donations of office supplies that your organization uses and you receive donations of supplies that you use to support the victims of fire, natural disaster, and other qualifying events. To track the two types of supplies in more detail you would establish two sub-accounts under Supplies In-Kind Expense:
- Supplies In-Kind Expense: Internally Used
- Supplies In-Kind Expense: Used to Support Clients
In the above example, if the donation was for office supplies to be used by your organization in conducting every day business operations, you would debit the Supplies In-Kind Expense: Internally Used sub-account. Conversely, if the donation was for supplies to be used in one of your non-profit outreach programs, you would debit Supplies In-Kind Expense: Used to Support Clients sub-account. As you can see, the use of sub-accounts allows you to keep track of supplies donations in greater detail.
Donation of Equipment:
Next, let us look at how to record a typical equipment donation. The first thing you will need to determine is whether the equipment being donated would be considered a capital asset or not. This is where the organizations capitalization policy comes into play. Let us say that your organization capitalizes any equipment with a value of $5,000 or more. Using this capitalization threshold, let us look at two different donations:
Non-Capital Equipment Donation:
A donor gives you 10 generators, valued at 500 each. The total value of the equipment donated is $5,000. But, the value for each individual generator is less than $5,000. Therefore, you would record this as an equipment in-kind expense:
- Debit the Equipment In-Kind Expense account $5,000
- Credit the Donations In-Kind Revenue account $5,000
Capital Equipment Donation:
Now, let say that the donation was for one (1) generator valued at $5,000. Because your organization capitalizes any equipment with a value of $5,000 or more, this is a donation of a fixed asset. We would record this as:
- Debit Equipment In-Kind asset account $5,000
- Credit the Donation In-Kind Revenue account $5,000
Note that you should set up your Equipment In-Kind asset account with the appropriate sub-accounts that your organization normally uses for fixed asset accounting. That is you should have separate sub-accounts for land, land improvements, buildings, furniture and equipment, etc.
Donation of Professional Services
The final category we will look at is the donation of professional services. Generally, your non-profit organization must record the value of services donated to it when:
- The services require a specialized skill or advanced training to perform
- There is a reasonable method for valuing the services
- The organization would have purchased the services had they not been donated
Services that would qualify for such treatment the service performed must be professional in nature. That is, they must be performed by someone who has received advanced training. Secondly, the service provider must currently provide those services for fee in their normal course of business. Examples of professional services include accountants, attorneys, medical personnel, and tradesmen (plumbers, electricians, etc.) Thus, pro bono legal work performed by an attorney for your non-profit organization would be recorded. But, that same attorney volunteering as the emcee at your organization’s annual charity gala would not be a professional service and would not be recorded as a service in-kind.
A donation of a professional service can occur in one of two ways:
- The professional service is provided free of charge by the service provider; or
- The professional service is provided at a substantial discount
Let us look at how to record each of these. In the first instance we have 10 hours of plumbing work donated by a licensed plumber who would normally charge $75 per hour. To record this donation:
- Debit Professional Services In-Kind Expense account$750
- Credit Donations In-Kind revenue account $750
Now, let us suppose the plumber discounted their normal rate, charging only $10 per hour. You would record:
- Debit Building and Maintenance Expense account $100
- Debit Professional Services In-Kind Expense account $650
- Credit Accounts Payable account $100
- Credit Donations In-Kind Revenue account $650
Note that while your non-profit organization is required to record non-profit services donated to it, the donor does not get to claim a charitable deduction for dontating these services. The donor would record the donation of services as a normal business expense. For example, if the plumber gets recognition for donating their service, and that recognition results in generating new business; the plumber would record the donation of services as an advertising expense.
The information presented in the article is for education purposes and should not be construed as accounting or tax advice. For application of the principles contained in this article to your business, always consult a trusted accounting or tax professional. If you have questions or need further advise, please feel free to contact Dan Clark at email@example.com.