When you receive gifts of products, time and services, be aware that your organization can be held in even greater regard by donors of such In-Kind gifts, should you express your gratitude in a meaningful way—in a manner far and above how these contributions are usually acknowledged by non-profit organizations. This can be accomplished in strict keeping with the applicable IRS rules and regulations, which are especially explicit when it comes to In-Kind gifts and how non-profits handle them.
By law, non-profit organizations cannot provide a donor with the dollar value of an In-kind gift. Such valuations when applicable, relative to “fair market value” of In-Kind gifts, need to be professionally assessed and certified elsewhere—if they can be—and that is the responsibility of the donor. This certification subsequently needs to be resolved with the professionals and others who prepare the donor’s tax forms—whose work in turn will need to be reconciled with IRS regulations. In instances where time and service are donated, no tax break whatsoever is allowed, as the IRS Publication 526 clearly states, “You cannot deduct the value of your time or services…”
This unique aspect of In-Kind gifts often causes a non-profit organization to acknowledge them in understated, and almost offhanded ways, unlike the precisely stated amounts cited for gifts of cash and stocks. As well, the dollar value of gifts of cash and stocks can be directly related to specific programs and services made possible by such support, which is not usually the case with In-Kind gifts. Thus, appreciation of In-Kind gifts is not always expressed as effectively and graphically, but it can and should be.
A non-profit organization can acknowledge In-Kind gifts with descriptions of their practical value to the organization, and make some reference to their worth in dollars—what they might have had to pay “retail.” Most non-profit organizations could treat their In-Kind gifts in somewhat the following way:
Sample Acknowledgment for an In-Kind Gift
“Thank you for your generous gift of ________(Full Description)________ which we received on ____(Date)____. Your generous contribution will help to further the important work of our organization.
(Note: The benefit to the organization of the In-Kind contribution may be expressed in exact terms of its direct application to the organization’s operation, or it may be more appropriate that an indirect reference be made when the In-Kind gift’s application is not as sharply defined.)
While, according to IRS regulations, you will not be allowed to declare the value of your donation from our acknowledgment, we can say that, but for your generosity, we likely would have had to expend approximately $________ for what you gave as an In-Kind contribution. These are dollars saved which we are able to apply directly to support the programs and services we provide for the well-being of those whom we serve in our community.”
Recognition: Same as Cash
In addition, appreciation of in-kind contributions can always be publicly recognized by non-profits in their annual reports and other publications, with the donors’ names listed under the respective gift category amount related to the “retail value” of products, time or services donated. As stated previously, those figures would not be IRS-deductible amounts, and are not certified as such. But the public gestures by non-profit organizations regarding the “market worth” of In-Kind gifts are always greatly appreciated by the donors.
There can be little doubt that your In-Kind donors would be quite pleased to see their names listed in a contribution category of that “retail cost” right up there with the givers of cash. This public listing has been practiced for many years, with those contributing cash finding no fault when In-Kind donors are placed in the same category with them. And more importantly, donors of In-Kind gifts frequently express their gratitude for being recognized in such an appropriate and thoughtful manner.
Don’t Be Unkind to In-Kind
To reinforce the idea that it is a well-served practice to recognize In-Kind gifts in the way suggested, and that by not doing so could disappoint or alienate the donors of such gifts, I am reminded of two incidents.
Recognize What it Would Have Cost You “Retail”
Recognition of an In-Kind gift became a serious issue with a non-profit client of mine following the conclusion of a successful capital campaign. The new building was up and operating. Everyone—board, staff and the community—was satisfied and happy. The trouble came as the listing was being finalized for permanent and public recognition of the capital campaign donors on a bronze recognition plaque for the lobby, in preparation for the new building’s dedication event. Names were placed in columns under the specific and respective contribution levels. Those of us who were involved in various leadership roles for the campaign together reviewed, edited, and then approved the final rendering of the listing before it was to go to the plaque manufacturer. Then, two of the organization’s leading board members abruptly demanded the removal of the name of a major In-Kind donor from the $15,000 to $19,999 category, and demanded that the donor’s name be repositioned in the $1,000 to $4,999 category.
The In-Kind donor was a paint manufacturer. The original campaign expense budget for the paint (prepared well before its donation) reflected a best price to be paid in the market in the amount of $15,000 for the gallons required to paint all of the rooms in the new, several story building. The two shortsighted trustees adamantly insisted that, from experience with their own businesses’ manufacturing costs, the true expense to the paint company would only be approximately one-third of the retail price, and that was the gift category in which the paint contribution should be recognized. I went tooth and nail on this, and I finally won over the two truculent board members when they realized that, had not the paint been donated (no matter the cost to the paint manufacturer), the non-profit would have had to raise additional cash in the amount of $15,000 to pay for the paint.
Sometimes, being stubbornly practical and literal can do damage to the relations a non-profit has with generous benefactors. Imagine the officials of the paint company attending the dedication event of the building they supported, only to see their company’s name placed in a category not in keeping with the worth of the paint as they knew it—but greatly diminished in value as seen by the officials of the non-profit organization.
In-Kind vs. “Real Money”
I was going into the last month of a fund-raising consulting contract for a capital campaign with a social service organization. All had gone extremely well over our ten-month partnership. The organization’s volunteer leadership and staff did an outstanding job, the money was raised for the new building, and I felt that the last month of my contract required greatly reduced counsel on my part. Even if no counsel was necessary, the contract required that I be paid. In any event, I told them not to pay me for the last month. As I saw it, I “donated” $3,000 to the organization. Naturally, I did not attempt to declare that “value” for a tax deduction. But, when the celebrations were over and the new building was dedicated, I, with some anticipation, looked for my name to be listed in the campaign publication under the “$1,000 to $5,000” category, or included with their listing of In-Kind gifts. My In-Kind contribution was not acknowledged in any way. I asked the Director of Development about what I thought to be an oversight. The answer was quick and curt, “We appreciate what you did, but it was not “real’ money.” I saved them $3,000 from their capital expense budget, and the money was not “real?”
Valuation: It May Not Seem Fair, But It’s the Law
As the two foregoing examples show, the value of In-Kind gifts for which organizations should thank donors is not necessarily the same as the value that the IRS will allow for tax purposes—or that the donors perceive themselves as having given.
When it comes to putting a value on In-Kind gifts for the purpose of donors taking tax deductions the rules can seem to donors to be unfair. Basically donors of In-Kind gifts cannot take a deduction for the time that they donated as a part of that In-Kind gift. Only the actual out-of-pocket expenses for which donor have receipts can be treated as a tax-deductible charitable gifts.
For example, let’s say there is a furniture maker who determines what to charge customers for a table by multiplying the number of hours he works on the table by an hourly rate at which he values his time and expertise and then adding that amount to the cost of materials. In this example let’s say it takes him 10 hours to make a table and that he values his time at $50 an hour. And let’s say that the materials he used to make the table cost $100. He may see the value of that table totaling $600, and might try to get that price if he were to sell it. But instead of selling it he gives it to a nonprofit.
The question the furniture maker/donor and the nonprofit have before them is: What is the amount that the furniture maker/donor can take as a tax deduction for his/her gift of the table? The answer according to the IRS is simple: $100—only the out-of-pocket cost that the furniture maker/donor incurs. It doesn’t matter that he believes he could sell the table for $600. The furniture maker/donor’s time and skill–the value he adds to the cost of materials is not tax deductible.
Why does the IRS neither accept nor itself place a value on the donation of the furniture maker’s own time and expertise? Because there is no universal formula that can be applied to our furniture maker’s time and expertise to determine its fair market value (FMV). There are too many variables involved. The IRS could not relate to one craftsman’s tax break claim of a $50 per hour rate to another’s of $150 per hour. To complicate matters even more, imagine the differences when it comes to the total time taken to make the furniture. The per-hour charge, and time taken to make the product, are variables which cannot be reconciled by the IRS.
It may not seem fair, but it’s the law. Arguments could be made for a different tax valuation structure, but those arguments would need to be made to Congress not the IRS. The latter only administers the laws that the former makes.
Never Take In-Kind Gifts for Granted
The final message here is that you must regard all types of “In-Kind” gifts with the care and consideration they deserve. It’s so easy, and so appropriate to acknowledge “real” cash and securities properly. But all too often when it comes to In-Kind gifts, it’s another kettle of fish. It should not be.