Nonprofit organizations collect many different types of support from donors, which are not always cash gifts. When an organization receives gifts of goods or services, it may lead to questions. How and when do gifts in-kind get recorded?
What are gifts in-kind?
Gifts in-kind are donations of tangible and intangible individual property and contributions of services made to a nonprofit. Tangible gifts-in kind include clothing, furniture, equipment, inventory, supplies and many other things. Intangible gifts in-kind include contributions of advertising, patents, royalties and copyrights. Gifts in-kind can also include things like discounted rent and services provided such as legal, accounting, plumbing, nursing, physicians and other professional services.
When are gifts in-kind recognized?
In general, gifts in-kind are recorded when a donor provides the item unconditionally and without receiving anything in return. There are also special rules for when (and if) donated services are recorded.
How are gifts in-kind recorded and valued?
Gifts in-kind are recorded at fair value as contribution revenue and an asset or expense in the time received. Unconditional promises to give noncash items are also required to be recorded as contribution revenue in the time the promise is made even though the organization may not receive the asset or benefit until a future time. In this case, a corresponding asset would be recorded when the contribution is made and expensed in the time benefitted.
The fair value of a tangible asset, such as supplies, can be determined by using the price you would pay on an open market for the item. For example, if a donor gives a carton of pens, the organization could obtain the price for a similar carton of pens from an office supply store to record the value of the contribution and related expense.
The fair value of services received could be attained by determining the normal hourly rate for the service. For example, if a CPA donates eight hours for accounting services, and his normal hourly rate is $150, then your organization would record $1,200 of contribution revenue and professional fees expense. However, there are certain considerations that could affect this, such as the type of experience needed for the types of services performed.
Are in-kind gifts reported on the 990?
In-kind contributions of tangible property are reported on the 990. In-kind gifts of property are reported as gifts, grants or contributions. If an organization receives more than $25,000 in noncash contributions or receives contributions of art, historical treasures or other similar assets, then the Organization must also complete Schedule M.
In-kind donations of services are not reported on Form 990, but the value of those services is shown as reconciling items on Schedule D if the organization had an audit.
By Maria BasinskiPosted on July 12 2016 by admin
Does your organization check all the right boxes? For Schedule A, that is. Schedule A is a crucial piece of the 990 for nonprofits as it calculates whether they truly qualify as a publicly supported organization or not. Generally, to be considered a publicly supported organization, the nonprofit must have support of at least 33 1/3% from the public in the aggregate of five years, meaning the support is calculated on a rolling five year basis. If an organization were to fail the public support test in two consecutive years they would be required to file a Form 990-PF as a private foundation instead of the general Form 990.
Support from the public includes contributions from individuals, trusts, or corporations as well as governmental agencies. It can also include income from program services such as admissions if the exempt organization were, for example, a museum. Types of revenue that are not considered public support include investment income, income from unrelated business activities, rental income, royalties, and special event income outside of the contribution portion. Even an unusual contribution (large and unexpected) is not included in the public support calculation since it would skew the percentage over the five year calculation.
Part I of Schedule A has a checklist asking the reason for public charity status. The most common boxes that organizations check are Box 7 or Box 9. To decide what box to check, the organization can first look to their IRS determination letter or Form 1023. Box 7 typically relates to those exempt under section 170(b)(1)(A)(vi) of the Internal Revenue Code, meaning most of the public support is contributions. When Box 7 is checked, Part II of the schedule is completed in order to determine if those contributions compose more than 33 1/3% of total support (income of the organization) for the past five years.
Box 9 typically relates to organizations exempt under section 509(a)(2) of the Internal Revenue Code, meaning most of the public support is income from program services, even if they still receive contributions as well. When Box 9 is checked, it requires Part III of the schedule to be completed to calculate the 33 1/3% public support test mentioned above. If the organization cannot pass the 33 1/3% test but does have more than 10% of its total support from the public from the past five years, Part II will be completed. In this 10% test, the organization must provide facts and circumstances proving that they are publicly supported.
It is important to understand the differences between Box 7 and Box 9 because an organization is allowed to choose a more appropriate box than what their IRS determination letter has listed in order to provide more accurate reporting.
By Rebecca DavisPosted on June 28 2016 by admin
Please note the new filing date for Form 1099-MISC, per the IRS:
Public Law 114-113, Division Q, Section 201, requires Form 1099-MISC to be filed on or before January 31, 2017 (compared to February 28th in the prior year), when you are reporting nonemployee compensation payments in Box 7. Otherwise, file by February 28, 2017, if you file on paper, or by March 31, 2017, if you file electronically. The due dates for furnishing payee statements remain the same.
I strongly encourage you to mark these dates in your calendar as the penalties for noncompliance are steep!
If an organization has intentionally disregarded filing requirements, then the penalty is $500 per 1099 with no maximum cap.
As a reminder, you are required to file a Form 1099-MISC if you made, as part of your trade or business, any of the following types of payments:
- Services performed by independent contractors or others (not employees of your business) (Box 7)
- Prizes and awards and certain other payments (see Instructions for Form 1099-MISC, (Box 3 Other Income, for more information)
- Rent (Box 1)
- Royalties (Box 2)
- Backup withholding or federal income tax withheld (Box 4)
- Crew members of your fishing boat (Box 5)
- To physicians, physicians’ corporations or other suppliers of health and medical services (Box 6)
- For a purchase of fish from anyone engaged in the trade or business of catching fish (Box 7)
- Substitute dividends or tax exempt interest payments if you are a broker (Box 8)
- Crop insurance proceeds (Box 10)
- Gross proceeds of $600 or more paid to an attorney (generally, Box 7, but see instructions as Box 14 may apply)
Please see the 2016 instructions for Form 1099-MISC for other useful information.
By Kristian HaralsonPosted on June 21 2016 by admin
The Giving USA Foundation (a public service initiative of The Giving Institute) has released their 2016 annual Giving USA Report on Philanthropy in collaboration with The Indiana University Lilly Family School of Philanthropy. Using data from calendar year 2015, the Giving USA report compiles and analyzes data on charitable giving in the U.S in order to identify trends that can be useful to nonprofit organizations. The following is a summary of the sources of the $373.25 billion in charitable giving disclosed in the 2015 report:
(Numbers in billions of dollars and rounded)
- $265.01 (71%) Individuals
- $59.72 (16%) Foundations
- $29.86 (9%) Bequests
- $18.66 (5%) Corporations
Seventy-one percent of donations come from individual donors in 2015. This is a familiar statistic, as the giving from individual donors composed 72% in both 2014 and 2013. In fact, very little changed in the overall mix of donor sources from 2014 to 2015. Bequests increased from 8% to 9% of the total, and Foundations increased from 15% to 16%. Corporations remained consistent at 5%. Giving USA notes that the total increase in charitable giving was 4.1% from 2014 to 2015, and was primarily driven by an increase in donations by individuals. This translates to an increase of $80.8 billion, and builds on the increase of 7.1% from 2013 to 2014.
In addition to the breakdown of contribution sources, the Giving USA Report also highlighted some other interesting information:
- Average annual donations made by U.S households reached $2,124 in 2015, in comparison to $2,030 in 2014. It is also estimated that giving by both itemizing and non-itemizing individuals increased by 4.1% and 2.5%, respectively.
- The 3.9% increase in corporate giving is attributed to the 2015 increase in GDP and corporate pre-tax profits of 3.5% and 3.3%, respectively.
- The nonprofit categories seeing the highest increases in giving are education, public-society benefit, environmental and animal, and international affairs organizations.
- Total giving as a percentage of GDP during 2015 and 2014 reached a post-2006 high of 2.1%.
More information regarding the Giving Institute and the Giving USA report can be found here. A two page summary of the highlights from the full report can also be obtained at no cost on the Giving USA website.
By Paul BiggsPosted on June 15 2016 by admin
On June 1, Charity Navigator announced the launch of CN 2.1, an enhancement of their previous charity rating system CN 2.0. This includes several changes to the seven “Financial Health” rating metrics used to evaluate charities, and to help donors make wise decisions in choosing where to make their donations. Here are the primary changes that have occurred in the change from CN 2.0 to CN 2.1:
- Primary revenue growth: Annualized growth in primary revenue from the most recent three to five years was included under CN 2.0. This has been removed from the CN 2.1 rating system. This seems to be a wise choice, as revenue growth does not necessarily demonstrate how impactful and efficient a nonprofit is with its resources.
- Several metrics involving expenses have been modified to include the average expenses from the charity’s three most recent fiscal years, instead of only considering expenses from the most recent fiscal year. This should present a more accurate representation over time, as one year may be an anomaly. The change has been applied to program expenses, administration expenses, fundraising expenses, and the working capital ratio:
CN 2.0 Program Expenses ÷ Total Expenses
CN 2.1 Average Program Expenses ÷ Total Average Expenses
CN 2.0 Administration Expenses ÷ Total Expenses
CN 2.1 Average Administration Expenses ÷ Total Average Expenses
CN 2.0 Fundraising Expenses ÷ Total Expenses
CN 2.1 Average Fundraising Expenses ÷ Average Total Expenses
Working Capital Ratio:
CN 2.0 Working Capital ÷ Total Expenses
CN 2.1 Working Capital ÷ Average Total Expenses
- Fundraising Efficiency: Similar to the changes in expense metrics, the calculation of fundraising efficiency has been changed from the single year calculation of fundraising expenses ÷ total contributions to the three year calculation of average fundraising expenses ÷ average total contributions. This should also present more accurate results as contributions may be solicited and received across different fiscal years.
The implementation of this new rating system resulted in 27% of the 8,000 charities rated by Charity Navigator receiving a new star rating. Nineteen percent increased by one star, while 8% decreased by one star. For more information on the rating changes, see the Charity Navigator website.
By Paul BiggsPosted on June 2 2016 by admin
Ever heard the cliché “comparing an apple to an orange”? I’m not a scientist and I don’t know the cellular differences of both, but I do know that oranges are acidic with a thick peel usually removed prior to consumption. Apple, on the other hand, is a brand of electronics most commonly seen in the form of a contraption on people’s hips to text, make calls and take pictures. Ok – just kidding – in this statement the apple I’m referring to is a fruit and this is a statement that has been used for centuries to point out that two items, although in the same category, are not always comparable.
So, where am I going with this? Someone, somewhere at some point analyzed a not-for-profit’s statement of functional expenses and related the amount of expenses in the program column to the amount “spent on the mission of the organization”. It has now become an unfortunate misconception that all other expenses are “wasteful” or “irresponsible” resulting in organizations feeling pressured to keep their program expenses high and management and general and fundraising low. “What percent of total expenses should a not-for-profit spend on their program?” is perhaps the most frustrating question I hear.
In my opinion, it is unreasonable to set a standard percent of program expenses organizations should meet to assess if they’re spending their funds towards their mission. There are innumerable charitable entities, each with unique revenue streams, cost structures, and personnel. Some charge program fees for the services they provide whereas others rely solely on donations. Some are heavily reliant on volunteers while others have employees to run the program. I know a few that don’t even have employees! These are things that directly affect the allocation of expenses.
You might be wondering how do the aforementioned examples affect the percent of program expenses? Well, if an organization doesn’t charge for services, they must have a higher focus on fundraising efforts to support their mission. Therefore, they’d have higher fundraising expenses than an organization that charged fees. A higher percent of fundraising expenses means you’d have a lower percent of program expenses. If a charity can rely heavily on volunteers, they don’t have to hire as many employees to run the program. Free labor is great! However, how would this organization compare to one that has fewer volunteers and more employees? It would appear to have a lower percent of program expenses due to the other having more for the salaries paid.
These are just two of the many factors that affect the allocation of expenses of a charity. I encourage you to look beyond the financial statements (which is not something you hear often from an auditor) and assess each not-for-profit separately. It’ll be much easier than trying to compare an apple to an orange.
By Samantha E. Mahlen, CPAPosted on May 19 2016 by admin
Recently, I overheard two individuals discussing ethical fundraising practices for their small nonprofit organization over lunch. As an auditor specializing in non-profit, you can imagine how quickly this caught my attention. I was grateful for the noise of the restaurant and the influx of customers as I scooted my chair a little bit closer to hear their conversation. If it wasn’t for the dab of freshly dropped Dijon mustard down the front of my shirt, I might have introduced myself rather than awkwardly listened. I thought I would share some of their thoughts with you, while adding some of my own in italics:
- Maintain donor trust by respecting their requests and intent of the donation.
It is a legal/fiduciary obligation of the non-profit to honor donors’ requests; therefore, it is essential that your staff understand what a restricted gift is and its significance. Keep in mind – a verbal agreement between a donor and a non-profit regarding the use of donor funds is enforceable. To protect the organization, I suggest implementing written agreements to describe how funds will be used and as a way to help manage donors’ expectations.
- Send gift acknowledgements timely.
The National Council of Nonprofits’ has a tip sheet on “Saying Thank You to Donors”.
Also, certain gifts have a legal requirement to acknowledge donors’ charitable gifts. The IRS details when those acknowledgements are required and has examples of written acknowledgements non-profits can use.
- Respect donors that wish to remain anonymous.
A donor could wish to remain anonymous for a number of reasons. As a non-profit, it is your obligation to respect their right. To address donors’ concerns, the Association of Fundraising Professionals (AFP) created a Donors’ Bill of Rights and encourages non-profits to adopt the policy.
To add my own – be transparent with financial information and fundraising practices as it inspires confidence from the public. This prevents myths about misuse of funds and inspires donors to make contributions if they can see how their funds are impacting the community and organization.
By Kristian HaralsonPosted on May 4 2016 by admin
Prior to becoming a CPA, when I heard “independence” I would think of Toby Keith songs, fireworks, and the American flag. Now that I’m an auditor, independence is not only a celebration on July 4th but also an assessment we must make on every attest engagement we perform.
The American Institute of CPAs (AICPA) accurately states objectivity as “a distinguishing feature of the profession”. An engagement team’s independence and lack of bias towards a client gives the users of the financial statements (the Users) confidence that the statements present fairly, in all material respects, the financial position of the entity.
The AICPA’s Code of Conduct (the Code) defines several “threats” that, without proper safeguards in place, could impair the independence of the auditor. In the not-for-profit world, the most applicable threats are familiarity, management participation, and self-review. For example:
- Familiarity: The wife of one of the attest engagement team members is the CFO of the client.
- Management participation: A tax partner of the firm serves as a director of the entity.
- Self-review: The firm’s accounting niche prepares invoices or other source documents and calculations for the attest client.
Would the team member write up his wife on a material weakness if he knew it could affect her bonus (and result on him sleeping on the couch)? Would the partner give an adverse opinion if it reflects poorly on a fellow partner or would an attest engagement team review work of their coworkers and write it up as wrong? Either of those would make the holiday party quite awkward.
There is a plethora of situations that could result in a threat to independence. Our profession is continuing to assess and update standards to mitigate these threats. After all, you’re paying for an unbiased opinion and that’s what you should get.
By Samantha E. Mahlen, CPAPosted on April 20 2016 by admin
Volunteer time (or donated services) is only recorded as revenue and expense in the financial statements if the services create or add value to a non-financial asset (such as construction services provided to a building) or if the services meet all of the following three criteria:
- The services require specialized skills
- The services are provided by individuals who possess the specialized skills required
- The services would typically need to be purchased if not donated
The specialized skills include skills provided by individuals such as accountants, bankers, electricians, doctors and nurses, or teachers. An indication that skills are specialized is that the individual is required to possess a license or certification to provide the services, and the services require technical tools or equipment used with a higher level of proficiency than the general public. If an individual with specialized skills provides volunteer services that do not require those skills, the volunteer services should not be recorded in the financial statements. An example of this would be an attorney providing volunteer services coordinating a special event. Because the services are not legal in nature, they would not qualify to be recorded even though the lawyer possessed specialized skills.
Regardless of whether it qualifies to be recorded in the financial statements or not, volunteer time carries a high level of value to nonprofit organizations. The NonProfitTimes reports that total volunteer time provided to U.S. nonprofits in 2015 is expected to be valued at $188 billion. This amount is based on a calculation of 7.9 billion hours of volunteer service provided by 62.8 million Americans with an estimated average hourly wage of $23.56.
The full article is available here.
By Paul Biggs
Posted on April 12 2016 by admin
Whether you’re affiliated with a party or vote as an independent, you’ve probably considered “unfriending” or “unfollowing” some of your more politically opinionated friends on social media due to the relentless long-winded paragraphs and meme posts about Trump’s hair or Sander’s age. I’ve come to the conclusion that I can either get off social media and avoid late night comedy or just try to ignore it.
The controversial issues of 2016, however, are difficult to ignore. Legislation concerning healthcare, potential budget cuts and immigration will heavily effect many charitable organizations. So what do you do if your entity would benefit most from a particular candidate winning the election? NOTHING.
Under the Internal Revenue Code, 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating or intervening in any campaign on behalf of or in opposition to any candidate for public office. Activities such as contributing to a campaign or issuing a public statement (verbal or written) on behalf of (or appearing to be on behalf of) the organization in favor of or opposition to a candidate and/or campaign would be a violation of this prohibition.
If you would like to keep your tax exempt status intact and avoid potential excise taxes, pay close attention to the activities of your entity. Monitor your expenses, especially for lobbying, to ensure it is in line with acceptable activities. Edit and control all statements made on behalf of the organization paying special attention to social media.
If there is any question as to if an activity would be a violation, contact your attorney for advice prior to commencement. Candidate/campaign support is one area of not-for-profit regulation that’s “black and white:” You just can’t do it.
By Samantha E. Mahlen, CPA-- Older Entries »
Our Not-For-Profit niche is a strong team of experienced professionals who focus their work in the not-for-profit industry. Henry & Horne has been a stable local firm in Arizona for 55 years, and the Not-For-Profit niche has a long history of working with charitable organizations and other tax exempt organizations of all kinds. Our focus is exceptional client service and building relationships with our clients to promote communication throughout the year, not just at the time of the annual audit. We highly value and are very proud to be helping those who help others.
Before posting a comment on a blog post please be aware that we do not give free advice to non-clients by email, comment response, or phone. Thank you!
- Everything You Need to Know: Gifts In-Kind
- What Your Schedule A Says About You
- Heads Up on Form 1099-MISC
- 2016 Annual Giving USA Report Released
- Charity Navigator Launches CN 2.1
- What Percent Should Charities Spend on Their Mission?
- Ethical Fundraising Practices
- Defining Independence
- Donated Services
- Let’s Get Political