Valuation of Non-Cash Donation (in-kind)

Valuation of non-cash in kind donationValuation of in-kind or non-cash donation is a tricky and complex issue faced by many nonprofit organizations. Many a times, a donor would like to inflate the value of in-kind donation made to your organization for getting higher tax advantage.

It is the duty of directors of non-profit organizations to arrive at and reflect a realistic value of the non-cash donation in its books. You need to know how much the donated asset is worth to know the true value of your organization’s asset portfolio.

Consequences of Inflated Valuation of Non-Cash Donations

Recording inflated value in the books risks the organization to IRS wrath including chances of loss of its exempt status besides a direct loss of credibility with the stakeholders.

Several organizations have been penalized by IRS on this count, in the last few years.

Methods of Valuing Non-Cash Donations

There are several methods used in valuation of non-cash assets. Directors/Managers can choose any one method and should stick to the same method for similar donations over each subsequent year. Switching between methods on similar in-kind donations is not allowed under ‘consistency principles’ of accounting.

METHOD 1) VALUATION USING FAIR MARKET VALUE:

Valuing non-cash donations at their fair market value is one of the ways adopted by many non-profit organizations. Fair market value is defined as the cost at which the donated asset would have been normally sold by a seller to a buyer with no other hidden consideration and with both the parties having reasonable knowledge of its present value and other relevant facts.

Advantages:
• Provides high level of subjective independence to the directors and donors in valuing non-cash donations
• Provides for current market value, taking into account any increase or decrease in asset’s value
• Donors get the most benefit with increase in valuations
• Asset portfolio of the organization looks bigger

Disadvantage:
There is no objective fixed formula for calculating fair market value. This definition poses problems for an objective valuation of the non-cash donation organizations. IRS and other watch dogs may seek additional explanations for assets valued using this method.

METHOD 2) VALUATION USING COST PRICES:

Cost price can easily be assessed using purchase bill or other documentary evidences. Thus it provides an objective value assessment method for in-kind donations.

Advantage:
• Clear and objective valuation
• No scope for objections by watchdogs
• Easy to implement.

Disadvantage:
• Does not consider increase of decrease in value since the time of purchase
• Gives an outdated value of donations in case of very old assets
• Realistic only if purchase or sale made close to donation time
• Realistic only if purchase or sale made at an arm’s length.
• May not be suitable for receiving in-kind donations with no proof of its original cost
• Donors may not be able to enjoy tax exemption to the actual tune of donations made

METHOD 3) VALUATION USING SALES PRICE OF COMPARABLE PROPERTIES

In concept, this is similar to fair market value. Additionally this method seeks to keep a documentary evidence (say a ‘proforma invoice’) indicating the sales price of comparable properties as on date of contribution.

Advantage:
• Provides an update value of the asset
• Provides a more objective method of valuation as compared to using fair market value.
• Value assumptions can be justified with the public watchdogs
• Donors can get tax exemption in tune with the value of non-cash donation

Disadvantage:

• Not suitable, if references to similar assets are not available
• Requires additional effort in collecting reference prices

METHOD 4) VALUATION BY EXPERTS

Certified appraisers, assessors and surveyors can provide realistic estimation of value of in-kind donations.

Advantage:
• Provides a correct and realistic value of the donated asset
• Valuation is based on a combination of scientific, objective and subjective assessment
• Value certificates are issued under the signature of Government certified assessors
• Value assumptions are generally (but not always) acceptable to the IRS and other public watchdogs
• Donors can get tax exemption in tune with the value of non-cash donation

Disadvantage:

• Entails cost of valuation (appraisal fee)
• Requires personal verification by the assessor
• May be time taking.
• Not feasible for valuing low cost in-kind donations
• Not feasible for valuing frequent in-cash donations.
• Appraisal cost is not allowed as part of the charitable deduction

IRS norms for qualified appraisal of non-cash donations

IRS mandates a compulsory qualified appraisal, if the deduction claimed against the donated property exceeds $5,000. The donor is required to report this deduction on IRS Form 8283 (individual
income tax return). The donor can claim a miscellaneous deduction with an upper cap of 2% as an itemized deduction in his individual income tax return.

As per IRS norms, to be considered a qualified appraisal, the valuation should not be more that 60 days older than the date of contribution.

IRS requires such appraisals to stick to formats which include property’s description, physical condition, qualification of the appraisal and all other material disclosures. IRS also mandates that the appraisal fee should not be based on a percentage of the appraised value of the in-kind donation.

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About the Author:


Samuel D. Payne is an accountant by profession specializing in nonprofit audit, tax and services.You can contact him for reliable and expert guidance on non-profit accounting and quality auditing services. His areas of speciality include: OMB circular A-133 audits, Exempt Organization tax returns, Internal Controls, Budgeting, Accounting & Bookkeeping , Payroll Processing and Grants Management.

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4 Responses to “Valuation of Non-Cash Donation (in-kind)”

  1. Cydnee Hines says:

    My non-profit has been inactive for three years. I would like to reactivate under another name with the same purpose. How would I go about making these changes?

  2. Johnathan Stagg says:

    What’s the difference between 501c3 & 501c4?

  3. ARTHUR says:

    i want to start a foundation need direction how.

  4. Frank says:

    Is the organization IRS 501 C 3 certified ? The process varies? Be more specific

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