Unwrapping the Complexities of Noncash Contributions
Noncash contributions have become increasingly sought after by nonprofit organizations; however, they often bring confusion and headaches to the organization. Examples of noncash contributions include donated vehicles, free or reduced rent, pro-bono legal services, and free advertising.
What follows is a general primer to help you unwrap the complexities of noncash contributions. Keep in mind that many complexities fall beyond the scope of this short article.
All donated goods—such as food, clothing or computer equipment—should be recorded as contributions. (Donated vehicles have special rules that are covered below.) Organizations should record noncash contributions at their estimated market value on the date they were given. This generally results in an increase in both revenue and expenses for the nonprofit.
Although not required by the IRS unless the value of the noncash contribution exceeds $250, organizations should send receipts to donors for noncash contributions just as they would for cash contributions with one important exception: the receipt cannot include a dollar amount for noncash contributions. Instead, organizations should include a description of the noncash item donated. For example, a description may read like this: 4 bags of clothing, 2 baseball tickets each with a face value of $50, and a pair of diamond earrings with a total carat value of .50. It is up to the donor to decide the dollar amount they will claim as a charitable contribution on their tax return, which may not be the same as the value recorded by the organization.
Donated services are only recorded as a contribution if they meet the following criteria:
- The service is professional in nature (e.g., legal services, architectural services, etc.).
- The organization would have purchased the service had it not been donated.
- The person providing the service has completed the necessary professional training (i.e., legal training is required for providing legal services).
Generally speaking, there is no tax deduction for donating a service, even for services that meet the criteria listed above. Nevertheless, as a courtesy and to strengthen the relationship, most organizations still send out letters thanking professionals for their time.
The IRS has special requirements for donated vehicles. For starters, the IRS requires that vehicle donors receive a Form 1098-C in order to claim a deduction on their tax return. If the organization plans on keeping the vehicle for its use, the 1098-C must be received by the donor within 30 days of when the vehicle was donated. If the organization sells or auctions off the vehicle, the 1098-C must be received within 30 days of its sale.
New for 2014, the 1098-C must include the vehicle’s odometer reading at the time of the donation. It’s worth noting that many organizations use third-party service providers to handle their vehicle donations. These providers often take care of everything from picking up the vehicle to auctioning the vehicle and completing the 1098-C.
Other Noncash Donations
- There are also special rules and forms required for certain noncash contributions over $5,000.
- Advertising generally follows the same rules as noted in donated goods above (i.e., recorded at its market value).
- Donated or reduced (below market value) rent is also considered a contribution under nonprofit accounting rules. However, like donated services, the donor typically does not receive a tax deduction.
We encourage organizations to adopt a gift acceptance policy to help with decisions relating to noncash contributions. One especially important benefit of a gift acceptance policy is that it can define the types of noncash contributions an organization is willing to accept. Please email me if you’d like a sample gift acceptance policy.
The nonprofit team at Abdo, Eick & Meyers is always ready to help you understand the complexities of noncash contributions. We love answering questions and solving problems. Please don’t hesitate to reach out to us anytime.
Steve Anseth, CPA, is an AEM Nonprofit/Business Partner. Whether he’s helping a client reach their goals or competing in an inline marathon, Steve is always thinking ahead. You can reach Steve at 952.715.3029 or at firstname.lastname@example.org.