I get a lot of questions about the tax ramifications of in-kind donations (contributions other than cash). There are two basic types of in-kind donations:
Services (use of materials, equipment, facilities, etc.) -Examples of in-kind services are accounting or legal services, discounted or free rent of facilities, etc.
Goods – Tangible items that are donated to you, such as furniture, stock, etc.
For tax purposes, you’ll need to determine the fair market value (FMV) of the donated goods or services. You may use any reasonable method to determine FMV of the goods & services provided to the donor, as long as the method is applied in Good Faith. Here are a few ways to determine FMV:
Inventory – Value can be obtained from published catalogs, vendors, independent appraisals or other reasonable sources.
Depreciable assets (e.g. furniture, etc.) – These should be recorded at their fair values as of the date of the contribution. What do comparable items sell for at consignment stores?
Services – Use what the donor would normally charge for the services provided.
In-kind gifts that can be used or sold should be recognized on the financial statements at their FMV. If these gifts cannot be used by the organization or sold, they have no value and should not be recognized as assets or contributions.
If an in-kind contribution is to be used for fundraising purposes, such as tickets, gift certificates, or merchandise for an auction, these items should be recorded as a contribution, at the item’s FMV. Any difference between the item’s recorded fair value and the ultimate amount received for the item should be recognized as an adjustment to the original contribution amount.
Next time, I’ll address more details about contributed services and a form you need to know about regarding in-kind donations.