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How to Categorize Donations

Donations

Funding your nonprofit organization and making a difference in your community is not an inexpensive feat. So, you start fundraising! And hopefully, you are successful in finding people who want to donate. But what does that look like in your organization’s record books?

Introduction

Much like people, donations come in all shapes and sizes. Some are small; some are large. Or more specifically, some are cash, some are credit cards, some are physical objects, some are handed to you, and others are given online.

Wouldn’t it be easy if they could all be reported the same way in your books, to the IRS, and to the state? Well, unfortunately, that’s not the case. This time around we’re going to explain some of the differences between various types of monetary donations and how you should keep track of them.

Cash Donations

Cash donations are likely going to be the most common type of donations made to your nonprofit organization. Cash donations include a wide variety of ways of giving including, but not limited to, cash, credit card, check, online donations, grants, matching programs such as Amazon Smiles or company matches, and universal gift cards such as Visa or MasterCard gift cards that can be spent at any store.

This category also includes unreimbursed money spent by a person on behalf of the organization. This can even include donations made by someone to cover the expenses for the organization to “get started.” This is true even if those funds were paid directly to the service provider on behalf of the organization and not deposited into the organization’s bank account. It’s important to point out that these types of donations should be approved in advance, and even then, it’s not the preferred way to go. It’s always better for money to be directly spent through the organization’s account.

If expense money will be reimbursed to the individual, but not immediately, it is considered a loan to the organization prior to the payback. It must be documented in meeting minutes, approved by the board, and have terms of the loan agreement. This loan amount will then be recorded as a liability and will not be recorded as revenue to the organization.

Securities

While this is not as frequent of a donation, especially for smaller organizations, it is still something to keep track of separately if a donor decides to make this type of donation. This category includes the value of any stocks, bonds, or other type of securities that were donated to the organization. It’s important to note that you would only give the donor a receipt for the initial market value of the security at the time of the donation, as this would be recorded as a contribution of revenue to the organization. Market value for publicly traded securities can easily be established via the exchange the security is traded on. However, any subsequent gain or loss upon sale or interest, dividends, etc. earned after the donation is received is treated as if the organization was the one that purchased the security itself. The proceeds are then not considered a contribution.

Non-Cash (Tangible) Donations

What people don’t always account for is what to do when someone gives your organization a non-cash donation. This could be items like backpacks, computers, food, books, gift cards to one specific store, etc., and how you account for them is completely dependent on the purpose of the donation.

For instance, if someone donated a computer to the organization that will be kept and used by the organization, you would need to look up a similar computer and find the fair market value. That amount is then what would be recorded in the organization’s records.

However, if the donated item is received and then auctioned, or sold, the value will be treated differently. If the value of the item is more than the auction/sale price, you would reduce the value of the item to match the auction/sale price. For example, if a TV is donated worth $100 and auctioned for $75, the value of the TV would then be recorded as a non-cash contribution of $75. On the other hand, if the value of the item is less than the auction/sale price, you would leave the value of the item as is and record any amount above the value as a donation. For example, if a TV is donated worth $100 and auctioned for $125, the value of the TV is recorded as a non-cash contribution of $100 and a cash donation is recorded for $25.

Conclusion

Accounting, particularly nonprofit accounting, has complex rules that are quite different from that of a commercial business. Knowing how to characterize various kinds of gifts is just one example. In our next article, we’re going to take a look at how to categorize non-gift revenue, so don’t miss it!

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Katie Koenig

After starting as a Client Care Specialist with our Compliance Team, Katie transitioned to Foundation Group's Marketing Team at the beginning of 2020, helping to keep our readers and clients up-to-date on important compliance, best-practice, and informational content critical to their success.

This Post Has 2 Comments

    1. Hi, Amy. If you mean you have an attorney donating legal services, yes, you need to record the services received as an in-kind donation. Your attorney can give you an estimate of what that time was worth so that you will know how to value that. Ironically, although your nonprofit needs to record it as income, the attorney’s donated time/service is not tax-deductible for him/her. Donors can only deduct gifts of money or things, not time or labor.

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