What Is In-Kind Support and How Do You Record It?

In-kind support represents a form of contribution to organizations, particularly non-profits. Unlike monetary donations, in-kind support involves the provision of goods, services, or property rather than cash. Understanding how to properly categorize, value, and record these non-cash contributions is important for financial transparency and compliance. This guide will clarify the nature of in-kind support and outline the processes for its accounting treatment.

Understanding In-Kind Support

In-kind support, also known as in-kind contributions or gifts-in-kind, refers to non-monetary donations received by an organization. These contributions provide value that would otherwise require a cash outlay if purchased, distinguishing them from direct financial gifts.

Organizations often rely on in-kind support to fulfill operational needs, support programs, or reduce expenses. For instance, a non-profit might receive donated office supplies, professional services, or the use of facilities. This type of support helps organizations conserve their financial resources, allowing them to allocate more cash towards their core mission.

Categories of In-Kind Contributions

In-kind contributions encompass a variety of non-cash donations, broadly categorized into donated goods, donated services, and the use of facilities or equipment. Understanding these categories is essential for proper identification.

Donated goods include tangible items such as office supplies, furniture, computer equipment, or inventory like food and medical supplies. For example, a local business might donate surplus computers to a school, or a grocery store might contribute unsold produce to a food bank.

Donated services involve professional or skilled labor provided without charge. This can range from legal advice offered by an attorney, accounting services from a CPA, or medical care from a physician. Even skilled trades, such as an electrician volunteering time for facility repairs, fall under this category.

The use of facilities or equipment refers to instances where an organization is granted free or discounted access to property or machinery. This could involve a company providing rent-free office space, a community center offering its halls for events, or an individual lending a vehicle for program activities.

Assigning Value to In-Kind Support

Determining the monetary value of non-cash contributions is important before recording them in financial statements. This valuation process ensures accurate financial reporting, supports transparency, and aids in compliance with accounting standards and tax regulations. The general principle for valuation is to assign the fair market value (FMV) of the donated item or service.

Fair market value is defined 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. For donated goods, this means assessing what the organization would have paid for similar items in their current condition. For example, new items are valued at their retail price, while used items consider wear and tear or comparable sales.

Valuing donated services involves determining the market rate for similar professional or skilled services. For instance, an accountant’s donated time would be valued at the hourly rate a non-profit would normally pay for similar accounting work. For the use of facilities or equipment, valuation often relies on comparable rental costs for similar spaces or equipment in the same geographic area.

It is the donor’s responsibility to determine the value for tax deduction purposes, and the recipient organization should not provide a valuation to the donor.

Recording In-Kind Transactions

Once the fair market value of in-kind support has been determined, the next step involves recognizing these contributions in the organization’s financial records. This accounting treatment adheres to generally accepted accounting principles (GAAP), ensuring that the financial statements accurately reflect the full scope of an organization’s resources and activities.

In-kind contributions are recognized as both revenue (or support) and an expense or asset in the financial statements. This “net zero” approach means that the value of the in-kind donation increases both the organization’s revenues and its expenses (or assets) by the same amount, reflecting the economic activity without impacting net income. For example, donated professional services would be recorded by debiting a “Professional Services Expense” account and crediting an “In-Kind Contributions Revenue” account for the fair market value. If donated goods are received that will be used immediately, an expense account is debited; if they are inventory or long-term assets, an asset account is debited.

Accurate record-keeping and documentation are important for recording in-kind transactions. Organizations should maintain detailed records including descriptions of the donated items or services, the date of receipt, and the determined fair market value. For significant donations, particularly those over $250, written acknowledgments to donors are required for substantiation purposes, detailing the donation and stating that no goods or services were provided in return. Internal documentation, such as time sheets for donated services or comparable market research for valuation, supports the recorded amounts for audit and compliance needs.