A 501(c)(3), or non-profit, is an IRS approved organization that has a charitable, religious, public safety, or educational purpose. The benefit of qualifying as a nonprofit is that the organization does not have to pay taxes on the money it receives and donors to a 501(c)(3) can deduct the amount of their gifts from their taxable income. As a result, classifying and measuring the amount of donations, such as in-kind donations, can be an incredibly important part of preparing an entity’s tax return.
Types of Donations
There are two types of donations that can be made a to a 501(c)(3). A cash donation is the transfer of funds to a nonprofit. An in-kind donation is the transfer of any other type of asset. Donors to a nonprofit can be private or corporate. While private donors generally tend to make cash donations, in-kind donations are not uncommon. Corporations may prefer donating its products or services because such items would be easier to provide than money if the business has inconsistent cash flow. Charities may also prefer in-kind donations because in-kind gifts typically cost less to the donor than cash; therefore, the donor can afford to give more.
The value of a donation must be determined by the donor; the receiving nonprofit is not permitted to provide a valuation of the property it receives. Since it is not cash, it can be more difficult to determine the value of a donation. The IRS requires that the donation be priced at its "fair market value." Determining FMV can be easier in some situations than in others. For example, if someone were to donate publicly-traded stock, it would be simple to determine the value of that stock. However, if someone were to donate a painting, a professional assessment by a third party may be required.
Deducting a Donation
Only tangible goods can be deducted from taxable income; services and time are in-kind donations but cannot be deducted. If the person who made the donation is an individual and she donated more than $500 worth of property, she will need to complete and attach IRS Form 8283, Section B to her personal income tax return. If the donor claims the total amount of her gifts exceed $500,000, she will also need to attach a qualified appraisal to her tax return.
Read More: Non Profit Donation Rules
Documenting the Donation
Regardless of whether you need to attach supporting documentation to your return, a donor needs to keep records of her donations for at least seven years after filing her taxes in case of an audit. When a donor makes a gift, the recipient will provide a document stating it received an in-kind gift. The receipt will describe what it received and when it was received, but will not list its value. It will also have the contact information of the recipient. The donor should also keep all documents that demonstrate the value of the in-kind donation when it was transferred, such as stock price and assessment reports.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.