Donations can be a major source of support for an organization. If donations are important to your work, it is crucial to know how to process the two types of donations, cash or in-kind. Traditionally, cash was the most common donation, a donation of cash, check or credit card, but recently in-kind donations have become more frequent.
Organizations have an obligation to receive the donation in a certain manner, to know if the donation is tax deductible and to receipt the donor appropriately. We will explain how to process each type of donation.
Cash vs. In-Kind
Traditionally, cash was the most common donation. A cash donation means a donation of cash, check or credit card, but recently in-kind donations have become more frequent. An in-kind donation is any non-cash item given to an organization to be used by the organization. An in-kind donation can range from something as simple as note books or copy paper to more involved transactions like real estate or stocks or bonds.
Charitable donations can be claimed by the donor as deduction on their individual tax returns (IRS Form 1040). It is the responsibility of the donor and/or their tax adviser to establish the value of the deductions and when to deduct and how.
Processing a Cash Donation:
The organization is responsible for processing the donation accordingly. The IRS requires that anyone making a cash donation over $250 must be receipted by the nonprofit that includes a statement that no gifts or services were received in exchange for the donation. It is important to note the donation amount and the date that the donation was received. It’s a good idea to get into the habit of receipting all donations, both cash and in-kind, as a formal way of thanking donors. The basics of what should be included in a donation receipt can be found here.
To internally process a cash donation make sure and enter it into the donor database and the accounting system. Check to see that donations targeted to a specific cause or program have been designated to that and if possible, note that donation designation in the donor receipt.
Processing an In-Kind Donation:
There are a few important differences when processing an in-kind donation. First, a thank you letter should be given that includes the statement “No goods or services were received in exchange for this donation.”However, do not include a value to the donation. The burden of value determination is on the donor. If the donor does plan on using the donation as a tax deduction, you do not want to be responsible for providing a false value.
Within the organization, you should determine a value to the donated items and record them as revenue. When used, an in-kind donation should be treated as expenses and recorded as expenses. In-kind donations can be an important source of support and properly recording this activity looks appealing to foundations and major donors. It shows that you utilize a number of revenue streams and that is important for attracting support.
Processing a Stock Gift:
A gift of stock is usually conducted through a broker. A stock donation begins by the donor transferring the stock directly to the organization. When the organization is alerted that a stock has been received they must provide the donor with a receipt that indicates the day that the stock was received and the high and low price of the stock on that day.
Organizations will should adhere to a policy when processing stock gifts, they will decide to automatically sell, or hold. To account for sold stocks all funds should be recorded as income.
Processing Volunteer Hours:
Volunteers can deduct out-of-pocket expenses while volunteering including mileage. If other expenses, in addition to mileage, are incurred the organization must provide a receipt showing the expenses and follow the format for a standard donation. The volunteer must provide all documentation for all volunteer-related expenses. It is important to note for the individual that the IRS regulation regarding volunteer hours or donated professional services are not valid deductions.
The organization should absolutely track and record volunteer hours. This can be an important piece of information when applying for grants and reporting. While this information is not used for accounting purposes it is important to share with stakeholders.
For special events, it is important to factor in event expense to ticket cost and receipt a donor for the amount over expenses. For example, if an event ticket is $100 and the dinner expense is $50 than the ticket holder should be receipted for the remaining $50 as a donation. The same applies to auction items. If an item is valued at $75 and the donor pays $100 then the donor should be receipted for the $25 donation.
There are important reporting guidelines on the IRS Form 990 in regards to special events. There is special reporting on events that bring in over $5,000 in revenue and those that exceed $15,000. Also, raffles or sweepstakes are considered charitable gaming activities and must be reported to the IRS on the annual 990.
Where to Find Help:
You can make the donations process much easier by utilizing an online budgeting software called MoneyMinder. This program has a “Donations” feature that tracks cash donations and allows you to create statements and send “Thank You” letters right out of the program. Specifically designed with nonprofit organizations in mind, MoneyMinder can save you money and time, so that you can spend more on what really matters.