One of the issues we frequently see — both when working on the financial statements of our not-for-profit clients and the tax returns of our individual clients — is how to place value on donations of goods and services. Not-for-profit organizations typically do not advise their donors regarding what value to place on donated goods, as the organization appropriately does not want to take any responsibility for what the donor reports on their tax returns. The amounts reported there are fully the responsibility of the donor.
Further, donors are not entitled to a deduction for the value of services they provide, so we are going to just focus on what the not-for-profit should be reporting on their own financial statements. We should note that these valuations are only reflected on your financial statements — under IRS rules, the value of donated goods and services may not be reported as either revenue or expense on Form 990.
The accounting rules require that the value of goods and certain types of services should be recognized in an organization’s financial statements. Although these items often have no bottom line effect — the common exception to this is the donation of a capital asset, such as real estate or equipment, which will be capitalized in your financial statements — the rationale behind these rules is that reflecting their value is the only way to measure the total operations of the organization.
In the case of goods, the tax rules used by donors actually provide good guidance on how to determine the value for the not-for-profit organization. Basically, non-cash donations should be valued by the organization at their fair market value at the date of donation. This is easy to apply if the donor has contributed shares of a stock. However, it can be much trickier if the donation is a tangible good, such as clothing or furniture. In those cases, the items should be valued at what they are worth to the organization (how much you could sell it for).
To determine this, we have seen clients go to retailer web sites for new items. For used items, a Google search for “valuing non-cash donations” will also reveal many websites that can be used to give ranges for various items. You should then pick some point within these ranges based on the condition of the item. (If asked, steering donors to these sites to help them determine what they can deduct on their personal returns is something they may appreciate.)
The accounting rules say not-for-profit organizations should only recognize the value of services that are professional in nature and would otherwise have to have been purchased by the organization. The standards actually provide a list of what types of services should be recognized. The list includes “accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers and other professionals and craftsmen.”
These services should be valued at whatever the donor would have normally charged. In our experience, the donors are usually willing to provide this information to the not-for-profit organization.
Why does any of this matter? For the not-for profit organization, including this information will give the readers of your statements a truer picture of the impact you are having. For example, assume your organization receives annual cash contributions of $1 million. Now, assume that you also receive goods and services totaling $5 million. Suddenly, instead of being a $1 million organization, you are a $6 million organization. This can make your organization look very different to potential donors considering whether they want to support you.
Because there is no cash involved, and often no bottom-line effect, valuing donated goods and services is something that often gets overlooked by not-for-profit organizations. However, it should not be, not only is this valuation required by the accounting rules, it can also have a powerful impact on how the donor community views your organization.
For more information on assessing the value of donated goods and services, contact Larry Sophian at 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.