What Is an In-Kind Donation and How Does It Work?

An in-kind donation is a non-cash contribution made to a charitable organization. These contributions support non-profit operations and missions, offering a valuable alternative to monetary gifts. Understanding their nature and implications is important for philanthropic efforts and financial planning.

Defining In-Kind Donations

An in-kind donation involves the transfer of goods, services, or property rather than money. Unlike cash donations, in-kind gifts can directly fulfill operational needs or be converted into funds by the recipient organization.

Common examples of tangible goods include clothing, vehicles, art, office supplies, and food items. These physical assets can be used by the organization for its programs, distributed to beneficiaries, or sold to generate revenue. Services, such as pro bono legal assistance, consulting, skilled labor, or the temporary use of facilities, also fall under in-kind contributions. The IRS generally does not consider the value of an individual’s time or services as a tax-deductible contribution for the donor.

Valuing In-Kind Donations

The core principle for valuing in-kind donations is determining their Fair Market Value (FMV). The IRS defines FMV as the price at which property would change hands between a willing buyer and a willing seller, with neither being compelled to buy or sell and both having reasonable knowledge of relevant facts. This standard applies whenever an item is donated and has tax consequences.

For used goods, such as clothing and household items, FMV is typically much lower than the original purchase price. Donors should consider the item’s condition, with the IRS generally requiring items to be in “good used condition or better” for a deduction. Online valuation guides or prices at thrift stores can help determine appropriate values for these items.

For larger donations like real estate, vehicles, or securities, determining FMV often necessitates a qualified appraisal. An appraisal is required for most noncash property donations exceeding $5,000, and for certain clothing or household items valued over $500 if they are not in good used condition. The donor bears the responsibility for determining the FMV of the donated item, especially when claiming a tax deduction.

Tax Implications for Donors

Eligible in-kind donations can provide tax benefits for individuals and corporations, allowing for deductions subject to IRS regulations. The deductible amount for these contributions is generally limited by a percentage of the donor’s adjusted gross income (AGI). For most non-cash contributions to public charities, the deduction is typically limited to 50% of the donor’s AGI, while contributions of appreciated capital gain property are often limited to 30% of AGI.

Proper documentation is essential to substantiate a claimed deduction. For any single noncash contribution valued at $250 or more, the donor must obtain a written acknowledgment from the charitable organization. This acknowledgment must include the organization’s name, the date of the contribution, and a description of the donated property, but should not state the value of the non-cash item. Donors must also maintain their own records, including the property’s description, the acquisition date, and its determined FMV.

Donors are generally required to file Form 8283, Noncash Charitable Contributions, with their tax return if the total deduction for all noncash contributions exceeds $500. For donations of a single item or a group of similar items valued over $5,000, Section B of Form 8283 must be completed, which necessitates a qualified appraisal and a signature from the donee organization. Failure to meet these documentation and appraisal requirements can result in the denial of the deduction.

Reporting Requirements for Organizations

Charitable organizations have specific responsibilities when receiving in-kind donations, particularly concerning donor acknowledgments and IRS reporting. For any single noncash donation valued at $250 or more, the organization must provide a written acknowledgment to the donor. This acknowledgment serves as the donor’s proof for tax deduction purposes and must be provided by the earlier of the date the donor files their tax return or its due date. The acknowledgment should describe the donated property and state whether the donor received any goods or services in return for the contribution.

If an organization sells, exchanges, or disposes of donated property (valued over $5,000, excluding publicly traded securities) within three years of the donation date, it may need to file Form 8282, Donee Information Return. The organization must file Form 8282 within 125 days after the disposition.

Non-profit organizations are also required to report non-cash contributions on their annual information return, Form 990. Specifically, Schedule M of Form 990 is used to report detailed information about the types and amounts of noncash contributions received during the tax year, particularly if the aggregate value exceeds $25,000. However, Schedule M does not include donations of services or the donated use of facilities or equipment for reporting purposes.