Megan Brooks
When a business makes a donation, it is important to keep a record of it. The way donations are recorded differs depending on the type of donation and the value. For instance, cash donations can be documented using a cancelled cheque or bank statement, while non-cash donations, such as products or services, should be recorded at their fair market value. Additionally, donations made to nonprofit organisations may need to be acknowledged in writing, especially if they are worth more than a certain amount. Properly recording donations is essential for accounting purposes, and organisations should be aware of how to post these transactions in their financial books or ledgers.
| Characteristics | Values |
|---|---|
| Cash donations | Cash, check, credit or debit card |
| Record of cash donation | Cancelled check or business bank statement |
| Record of product or inventory donation | Fair market value (FMV) of the product |
| Charitable donation deduction | Receipt or written confirmation from the charitable organization |
| Deduction for donation worth more than $250 | Contemporaneous written acknowledgment |
| Deduction for donation worth more than $500 and less than $5,000 | Form 8283 and contemporaneous written acknowledgment |
| Deduction for donation worth more than $5,000 | Form 8283 and contemporaneous written acknowledgment |
| In-kind donations | Goods or property (e.g. computer hardware, office furniture, medical supplies), intangible property (e.g. securities, copyrights), services (e.g. legal, accounting, web design) |
| In-kind donation recording | Recorded as soon as received, at minimum annually, at fair value |
| Determining value of in-kind donation | Market value of identical or similar assets, or donor's estimation |
| Donation as contribution or exchange | Contribution if donor gets nothing in return, exchange if they receive a gift |
| Multiple organizations involved | Only original recipient and end-user record item transaction, middle-man records expenses unless they improve the asset |
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Cash donations
If your business has made a donation, you need to record it as a donation expense journal entry. The way you record the donation differs depending on the type of donation. For cash donations, you must show the following in your records:
- Date
- Amount
- Description of the transaction
- Any relevant categories, such as savings, cash, petty cash, etc.
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Non-cash gifts
When a non-cash gift is made, the donor must determine the fair market value (FMV) of the item. The FMV is the amount that the item could be sold for on the market, and it may differ from the price originally paid for the product. Depreciation can also lower the product's FMV. Once the FMV is established, the donor can proceed with the appropriate accounting treatment.
If the non-cash gift has intrinsic value to the recipient, it is treated as a contribution revenue. For example, a donated security would be reported as an increase in investments. On the other hand, if the non-cash gift has no intrinsic value to the recipient, it is treated as a contribution expense. This could include donations of intangible assets, such as intellectual property, which would be recognized as an intangible asset.
Additionally, the donor must consider the tax implications of the non-cash gift. In the United States, Form 8283 is used to report information about noncash charitable contributions when the deduction exceeds $500. The Federal Tax Cuts and Jobs Act also changed the taxability of some non-cash awards and gifts provided to employees, with applicable income tax withholding and FICA taxes being deducted from the employee's paycheck.
Overall, while the basic principles of accounting for non-cash gifts are similar to cash donations, it is important to consider the specific nature of the non-cash asset and the relevant tax regulations to ensure accurate reporting.
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In-kind donations
Recording in-kind donations is crucial for nonprofits to accurately reflect their financial health and true operating revenue and expenses. It also helps present the types and value of contributions received to support its mission. While there is no one-size-fits-all approach, nonprofits must have accounting procedures in place to properly record and acknowledge in-kind donations.
Firstly, determine the fair market value of the donation. This is the price that the organisation would have paid for the goods or services on the open market had they not been donated. For products, consider depreciation and look for the prices of similar products. For professional services, use their standard hourly rate. Contact the donor if needed.
Next, record the donation in your accounting system. Include the donor's information and classify the revenue as "in-kind revenue" or a similar category in your chart of accounts. Record the fair market value as revenue and either an expense (if used immediately) or an asset (if kept in inventory or for the organisation's own use). This ensures a net zero balance as the revenue and expense cancel each other out.
Finally, comply with any additional requirements. For donations over certain thresholds, donors may need a written acknowledgment or receipt for tax deduction purposes. Nonprofits may also need to include in-kind donations on their tax forms and annual reports, depending on the type of donation.
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Contribution or exchange
When a business makes a donation, it is important to keep a record of it in the form of a donation expense journal entry. The way these donations are recorded differs depending on the type of donation. For instance, cash donations can be documented through receipts, cancelled cheques, or bank statements. Donations of products or inventory, on the other hand, should be recorded at their fair market value, which may differ from the price paid for the product. This value is determined by the price the product would have fetched if sold in the market.
Non-cash gifts or "gifts in kind" can also be recorded as donations. These include goods or property such as computer hardware, office furniture, medical supplies, intangible property such as securities, and services like legal or accounting advice. Organisations can record the amount of donated services they receive in a year, but this must be done in the notes to the financial statements or in an annual report. In-kind donations should be recorded as soon as they are received by the organisation and at their fair market value. This value is determined by what the organisation would have paid for the goods or services in the market.
It is important to determine whether a transaction is a contribution or an exchange, as they are treated differently in accounting. A contribution is an unconditional donation where the donor does not receive anything in return. An exchange, on the other hand, is when a donor receives a gift or benefit in exchange for their donation. For example, if a donor gives $1000 to a charity concert and receives 50 tickets in return, each valued at $20, the transaction is recorded as an exchange.
If multiple organisations are involved in the donation process, only the original recipient and the final recipient ("end-user") should record the item transaction. However, if a "middle-man" organisation improves or changes the asset, they can recognise its fair market value.
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Deductions
When it comes to deductions for charitable donations, there are a few things to keep in mind. Firstly, you can only deduct charitable contributions made to qualified organisations. These are typically IRS-qualified 501(c)(3) public charities or private foundations. You can use the IRS's Tax Exempt Organization Search Tool to determine if an organisation qualifies as charitable for income tax deduction purposes.
Secondly, the type of donation you are making will determine the requirements for deduction. For cash donations, you must maintain a record of the contribution, such as a bank record or a written communication from the qualified organisation, which includes the name of the organisation, the amount, and the date of the contribution. If the cash donation exceeds $250, you can use a cancelled cheque or a business bank statement as documentation.
For non-cash donations, such as products or inventory, you must determine the fair market value (FMV) of the item. The FMV is the amount you could have received if you had sold the item for cash. If the non-cash donation is worth less than $250, you must obtain a receipt or written confirmation from the charitable organisation describing the condition of the donation. For donations worth more than $250, you must obtain a contemporaneous written acknowledgment before filing your tax return. If the donation is valued at more than $500 but less than $5,000, you must fill out Form 8283, and for donations worth more than $5,000, you must fill out Form 8283 and obtain a qualified appraisal of the item.
It's important to note that different rules and regulations regarding tax deductions for charitable giving may apply at the state level, so be sure to check the specific laws relevant to your situation.
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Frequently asked questions
Cash donations can be made in cash, by cheque, or using a credit or debit card. If the cash donation is over $250, you can use a cancelled cheque or a bank statement as proof of donation. If the donation is less than $250, a receipt or written confirmation from the charitable organisation is required.
Non-cash donations, also known as "gifts in kind", can include goods or property such as computer hardware, office furniture, medical supplies, food, securities, copyrights, and patents. The fair market value of these non-cash donations should be recorded on the books at the price the organisation would have paid for the goods on the open market.
If you are simply a "middle-man" organisation facilitating the transfer of donations to another organisation, you should only record your expense in doing so, and not the value of the assets themselves. However, if you make any significant improvements to the assets, you can recognise their fair market value.
