Many not-for-profit organisations (NFPs) depend on gifts from the general public and businesses to achieve their charitable purposes. The gifts received by NFPs are either tangible property or personal services, which can be referred to as nonfinancial gifts or in-kind contributions. This article helps NFPs account for in-kind contributions when filing tax returns.
In-Kind Contributions Explained
Although cash rules in as far as charities are concerned, it's also common for not-for-profit entities to receive other contributions in the form of gifts. Therefore, in-kind contributions refer to donations of goods and services. Examples include property and goods, such as food, medical supplies, computer hardware and software and office furniture. Intangible properties, such as patents, securities and copyrights, that can help raise money are also regarded as goods. Similarly, professional services, including consulting, videography, accounting and legal services, can qualify as in-kind donations. Another form of donation is a contribution towards improving or creating an asset, such as building a shelter for homeless residents.
Accounting For In-Kind Contributions
According to Australian accounting standards, all NFPs must recognise assets at fair value, which implies that the value of all gifts received should be recorded in accounting books. Ideally, charitable entities should create an account code for all income received in the form of 'Income in-kind.' On the other hand, the expense side should be recorded against the relevant expense account, for example, advertising or legal services — as long as the expense is appropriate to the service received. In a nutshell, an accounting transaction does not have a bottom-line impact because the value of expense and income is the same. For example, if an NFP receives a donation of $3,000 worth of legal services, they should record 'Income in-kind'— $3,000 and 'Legal Services expense' — $3,000.
Time of Recording
As soon as a donor provides in-kind contributions to your organisation, you should record them in the period they are received. Alternatively, such donations should be recorded more frequently based on volume. In this sense, ensure that in-kind contributions are recorded at least annually. If a donated service is offered over time, the accounting process gets a bit complicated. In this case, ensure that you record the value of a contribution as an asset initially and recognise it in the organisation's Profit & Loss over a period of time. Alternatively, if an NFP receives donated goods, they should be recorded as assets until used.
Contact a local tax accountant to learn more.
Share6 April 2021
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