How to Record In-Kind Donations—Without Costly Mistakes!

Hey, welcome back everybody. It's another episode of the nonprofit show. If the uh green room was any example of how the show's going to go today, it's going to be a barn burner. We have great guests, a great guest on today, Justine Townsen. She's a manager with your part-time controller and of course the amazing Tim San Antonio, one of our intrepid co-hosts. We're talking about what really counts, inind donations. Justine, I feel like this is like one of those nebulous, mysterious things. And so I think you're gonna help set us straight. Thank you. >> Yes, ma'am. I'm excited to do it. >> Well, we're excited you're here and we are excited because we have amazing partners that allow us to have these conversations. They include Bloomerang, American Nonprofit Academy, Staffing Boutique, JMT Consulting, Third Sector Company, Your Part-time Controller, and Martist, the newest member of our partnership family. I'm Julia C. Patrick, CEO of the American Nonprofit Academy. And as I mentioned, the amazing Tim San Antonio, the generosity spectrum, uh, is with us today co-hosting. Tim has launched a really cool product that's like a training game role playinging thing. Follow him on LinkedIn. He's got great commentary about what's going on. Plus, he has this really exciting product and um I'm very very proud of him and I'm very proud that he's on our co-ho co-host team. So, I have to witness that Tim. Thank you. >> But Justine Townsen, she manager, your part-time controller. You might know Justine from the very very famous Halloween episodes that we do specifically with your part-time controller where she comes on and is amazing and a fabulous talent. And so um stay with us for next Halloween because Tim will also be on that episode. >> Talk about a barn burner. It's gonna be >> will be the band reuniting. >> Yeah. Love it. >> I love it. for the Halloween special. Um, well, we love that and we are delighted, Justine, that you're with us today. So, can you start us off and just level set us to explain what a true inkind donation is? >> Absolutely. And this could be so confusing. We have so many times I see folks not recording money that they should be recording because in kind donations are when we get something that we would otherwise have to spend money on. So the revenue comes from the savings. So we want to record that revenue and record that expense so that we are fully tracking our entire cost of doing business. But what is inind? It's graphic design. It's office space. It's equipment that's been donated to you. Somebody donates a car or a van for your program or program supplies get donated to you or food is donated. It's anything that you would otherwise have to spend money on. So if it's not something you need, we didn't we wouldn't call that in kind. It's only if you would otherwise have to spend money on it. And services can be a little bit complicated. So we're going to talk about that a little bit more in a minute. >> Okay. So I got to ask this question. um when we when we get our egos involved and let's say we're a professional and we're like well you know when I work in the public sector I charge you know $750 an hour and like how do we level set what the true value that somebody might be coming forward and saying this is the inind value do we play with that or how does that work? So, so when it comes to professional services and professional services are very specific. We can't record in kind for regular donated activities and we're going to talk about that in a second. It's really only if it's professional services. So, a CPA, an architect, a lawyer, they have to have a license to do what they're doing for you. >> Interesting. And yes, it is their normal hourly rate because that's the fair market value of the services you're receiving. Okay. Then you mentioned rent. I'm going to ask the same thing about rent because rent is, you know, all over the place. How do we look at that? Is it the same thing? It's a market condition. So, it's the market value, but we sometimes can have where rent is being given to us at a big discount. Let's say a board member owns our office space and so we're paying only maybe $100 to just cover the electricity that we're using in that space every month. And otherwise, the space is being donated. If the the donated value exceeds >> enough of a percentage and there's some complications there but of enough of a percentage then we're going to recognize that discount as an inind donation as well. So it is the market value what somebody else would be paying rent for that same space and that same area and that same community and that same type of building. But it'll be what the difference is between what we're actually paying or the entire amount if we're getting the entire uh space donated to us. >> Wow, Tim. >> Yeah, >> I can see you going h >> it's just my gears are turning. Yeah, there's so many things I'm thinking about cuz Justine, I know we have some other kind of more uh structured discussion about this, but I kind of the first thing I always think of because I dealt with in kind donations a lot my job, but it was kind of more like, you know, what I Googled, you know, or what I read a little bit, you know, or maybe going to a great company's website and finding a blog that I trust. But um I think the question I have is is who sets the fair market value otherwise known as FMV in your data? >> Yes. Yes. In my world. >> Well, and and and the reason I asked this is I worked a lot with my finance team when I was at my job before the the database company I last worked at. And we we talked a lot about these general concepts of mapping and the relationship between development and finance. And so I'd kind of love to hear from your perspective um what's the role of of you know a finance team member, a donor team and a donor themselves in this situation. And we can maybe simplify it like maybe there's a a usual good that's a little bit more straightforward that we can use as our example. I always think food banks, right? Like something like that. But there's depreciation. So I I want to know like is [laughter] it the bread that's getting thrown out? Like what's that? So like I don't know. It's actually not an EASY QUESTION. >> IT'S NOT EASY. It's not actually that's not an easy question. That's a very complicated question. Sorry. >> That's when you bring up food banks. So food banks actually there's a valuation that is published >> by the USDA that we use for food that was donated. So that's how we value that >> versus an office space. In that example, it would literally be what is the market for that? we would find another comparable space or if that you know board member who's donating us the space is um renting out to anyone else what are they charging those other um tenants would be the fair market value. So it really is just when we have that same transaction somewhere else. So what we call that is a third when we have that arms length transaction. So when it happens in the market, that's why we get into bare market value because what we're saying is the transaction is actually happening in the market like this. I Wow, this is a huge thing. I got to believe that the majority of people don't know this. We we bandandy about inind, you know, donations all the time. Yeah. >> But to really drill down, this is like impressive. so much on the table too because think about special events where we go and we negotiate to get a big discount on the catering. Well, if it is in there as a discount on services, we can't record that, nor can we tax receipt that. But if it's a discount on the food, then we can potentially tax receipt that and we can potentially record that depending on the percentage. It has to be a good if it's going to be a service, it needs to be professional. So right there, we can improve our relations with our vendors as well just by understanding in kind and that tax receiping piece. >> Yeah, it's sorry just I >> No, no, go ahead. >> Well, I I immediately think like, okay, just and again talk to explain to me like I'm a golden retriever, right? like this is, [laughter] you know, uh so if I'm a Michelin star restaurant, wouldn't that count as like my certification? >> You know, if I like >> it would not actually >> actually it would this is what I mean like where's the line, right? Yeah. >> Yes, there is a line. So, it's really is if it is a professional service that you would otherwise pay for. So if you were otherwise paying for a Michelin star chef, >> yeah, >> then yeah, maybe you're paying for a Michelin star. >> That's another that's another issue. >> Probably also not a good nonprofit and especially grassroots nonprofit >> by doing food and just saying, "Hey, donate the food instead." >> Yeah. There you Okay. Good. Good. Good. >> That's so funny. you know, um it's an interesting thing because I'm curious, you know, we need to know this in the nonprofit sector, um because it's really important to be tracking these things, but then how do we report this out and how do we use this when we are tracking it? Because is this just like for the balance sheet and the and the the auditors or does this get weave into marketing? Because people that do inind oftentimes they market that they did this right they they promote themselves as having done this type of work. So how do we >> well I mean and there's proper stewardship when you get into the develop you know development and fund development and finance getting a relations are like my favorite topic so let's not go down that rabbit hole but >> that is one of the ways where we really can communicate with each other and that is understanding and having that ongoing conversation about what gets recorded and what doesn't but then also how do we steward that gift if someone is giving us an office space. We want to make sure that we're recognizing that gift, recording that gift, but also celebrating and stewarding that gift for our donors. So there there's the other side of that is the stewardship of it. We want to report it. We need to we're required to report it in our 990, right? we are required to report what um inind um donations we received and also we're required to report in the 990 if we recorded any um inind professional services those don't get recorded on the 990 and so then we'll need to remove those so there is a lot of extra reporting we also report our total number of volunteers on the 990 and we report um the total value of any inind goods um on that 990. In the audit, we're also required to report on any professional services we receive. Um, and in a second I'm going to get to another trick in the audit for how you can celebrate your volunteers um, and communicate how well supported your organization is. Because in kind is really part of the story of how much the community loves, supports, needs, and and wants what you're doing. that inind is a huge component of revenue for a lot of organizations. So to not talk about it, to not communicate it would be to really undertell the story of their value and how valued they are. >> Yeah, I like that you brought that up because that's not really a a train of thought that I was following. I think that's I think that's really wise and you know that that makes everybody feel more encouraged to participate that way, >> right? >> Would you would you say that like would be one of the biggest obstacles that people are are stumbling over is the stewardship piece in terms of properly like what's the biggest you know thing that people struggle with you would say is like to prioritize fixing their inind donations management. I would say that communications between development and finance because development is out here negotiating getting inind and then not always communicating that back. >> Yeah. >> To finance until it's too late until we are stewarding that lane until we're tax receiving that maybe incorrectly. Yeah. >> We want to make sure that that communication is always happening. Um, and we're going to get into I think in a second some tools for how we can ensure that communication happens and that we stay on the same page always >> on a Can you talk are we gonna Julia remind me uh do we have a space to talk about what goes on the tax receipt >> or that let's talk about in a second. The first thing that I want to follow up on is the issue of volunteer revenue and tracking that because I think that you mentioned that >> and I I know that the you know Bureau of Labor Statistics every year comes out with what certain values are and it's it's shockingly high. >> It's very high. And here's the great news. You're allowed to tell people if you track your total number of volunteers and those volunteer hours, which you're required to track your total and number of volunteers. You have to report that in the 990. But if you track their hours and you track them well so that I can verify them, right? We have to have a system and we've tracked them well and we can verify them. Then in the 990, I can dis I'm not in the 990 in the audit uh the notes to the audit. I can't record the value of that volunteer time as revenue, >> but I can disclose it in a footnote to say we had this many hours and the Department of Labor values that at $70,000 or $300,000. To say that really communicates the value of your volunteers. And also, I always recommend sending out a newsletter at the end of the year in the same way you do an annual report for your donors. Do an annual report for your volunteers and communicate to them the value of what they've given you. That is stewardship so they keep coming back. >> I love that. And I think that with a lot of funders looking at what community support is, that might be a decision, a factor that that changes the decision, right? >> Oh, 100%. >> We have the support. People are showing up and doing the heavy lift. Um, really interesting. I love how you put it to the issue of reporting and counting and using as a communications and a marketing strategy. That's really smart. >> Well, I mean, it's our story, right? The finances are just our story told in a different way. And we want to just use them in the same way we use all of our other storytelling avenues to ensure that everybody knows the work we're doing, the value that we're bringing, and why we're doing it, right? And and that can only be told better through the numbers. >> Yeah. I love that. Okay. So, I think that you've really dispelled a lot of the mystery and the myths that we've got uh going on on the inind. But let's talk about the common mistakes that a nonprofit can be making because it seems to me that if you don't do this correctly, Justine, you're kind of torpedoing the whole the whole thing, the whole process of inkind donations. >> 1,000%. And this can go in like two different directions, right? So with incorrect value, we can overvalue them because we rely on the donor to tell us what the fair market value is. >> Yeah. >> And here is where this is where I'm sure that Tim has had opportunities to have conversations with the finance team because uh we get the valuation and we go that's ridiculous. >> Yeah. Stop [laughter] that. Yeah. I had a client that had got donated advertising and it was like they had fair market valued it at like a million dollars >> and we I I mean that would have like doubled their revenue for the year. It was ridiculous. So we had to say okay that's not true. Let's dig into what's the methodology they used. How can we how can we correct that? So yes, we do rely on the donor, but that doesn't mean that we're not gonna push back sometimes. >> Yeah. >> And over a certain threshold, the donor is required to get an appraisal and there is an additional tax form that your finance department actually needs to fill out. So yet another reason for finance and development to be having conversations. Um, >> that's that's a fascinating way to think about it and to actually know that you can't just randomly pick up and and run with some value. So, that seems to me like that's a starting point of a common mistake that somebody could really fall into. Another thing that you're advising is that gift acceptance policy, which shockingly a lot of nonprofits don't have until it's too late, until they have a problem. What's up with that? >> And there's a ton of free templates out there in the universe. I mean, um, so really, you can go get one today. It might not be perfect, but at least it'll be one. A gift acceptance policy is what prevents that issue between finance and development. The gift acceptance policy says this is what we're willing to accept. This is the form we're willing to accept it and these are our processes. So if there is something that's donated over this threshold, then we have to go through this tax process and we need this tax form and we need this appraisal form. All of that is laid out so that we are not putting a poor development person in charge of deciding whether or not to accept a broken down car because do we have [laughter] the infrastructure to sell that >> right? >> Probably not. And so do we actually want that? And so a gift acceptance policy will also say here are the things we're willing to accept and here are the things we don't want. But you can go sell it and give us the money. Thank you. >> Right. >> Well, and I think that also helps address especially in more underrec, you know, underrepresented communities a lot of times they're getting items that they can't use, right? That their community doesn't touch >> 100%. You know, and we get into a big part of with the valuation is you actually have to use it. So you can't record a value for it if it's not something you need. So if you if you receive something you don't need, >> then you can't even record it as revenue >> because nothing. >> Yeah, >> it it really has to have practical value. >> It's not here's my junk, go figure out what to do with it. >> Like here's my broken down car. [laughter] So, for instance, next week I'm going to a nonprofit, local nonprofit, Operation RED. Um, and uh uh it I'm donating books, right? My I have tons of books. My kids are getting older. I mean, my oldest got braces for goodness sakes this week for, you [laughter] know, that's that's throwing me off. But, um, you know, I I counted the books. I filled out the form, you know, that type of stuff. I I'd be actually interested in in your view on like how can we potentially modernize this process too because I it's of all the things in the world I would say in CRM land at least it's probably the most behind >> automation wise >> for sure for sure and I think part of that is that there are some organizations that heavily rely on in kind donations and they typically have their own CRM softwares that were developed for them very very >> that really focus on this in kind and so the rest of us in the other kinds of CRM you see less of that focus because if it really is your model you're going with so a food bank is going with a CRM that really focuses on food bank >> and there are customuilt ones that they use >> yes there are there are interesting okay >> okay so then let's talk about when if you're like not recording anything if you're not recording reporting anything, can that donor say, "Oh, well, I I did this. I took care of this. I'm going to report this." >> So, if you don't tax receipt them and they report it, that can be an issue, right? So, then we have a tax issue. So, that can be a red flag. But the other issue is if we're not recording it in our books and then we do get an audit, >> we have not actually we've understated our revenue and our expenses. Yes, our net assets might be correct, but we have understated the true cost of doing business. And here's the thing, guys. If you're getting office space donated to you every month and you don't have a budget where you're budgeting the actual cost of that office space and then booking the revenue, then you're not seeing what the true cost of doing business is. And should that office space ever go away, you have no clue how much it actually costs to run, >> this is how we communicate to the community and to ourselves what it actually costs to operate and to provide the things we're providing. Yeah, I I love that you brought that up because it's it seems like it's just oh, business is normal when we get something majorly donated like that, but it is not. No, that Yeah, thank you for bringing that up. Yeah, >> I Well, I this always brings me back to one of the biggest development and finance disconnect issues that I think I've observed in my my years, which is basing your strategy off the profit and loss statement alone. >> Mhm. And and this I think is is one of the best examples that I can point to of like why you cannot do that, right? I'm even sitting there going, I got to go talk to my accountants now. Actually, I have some things that this conversation has flagged for me. >> Oh, good. I love >> in a good way because of the space and things like that. I work with a fiscal sponsor. So, um fascinating conversation on that point. Um I I do think Julia, we are still looking for our baseline. What goes on the receipt though? That was one of the other ones, too. I want to hear about the reporting. But yeah, that's >> Yeah. As we're finishing up, I want to find out from you what should go on that receipt. >> Yeah. >> And that is no dollar amount. It is their job to fill in the dollar amount. Unless they've given you an appraisal and you're going through that whole other process with that other tax form, you don't put down a dollar amount. You put down what they gave you. >> Yeah. >> Okay. Mind blown. >> Their responsibility to provide the fair market value >> because I've seen >> I've seen so many nonprofits do this part. This is why I was obsessed with this question because I I observed it right when I was at my last job. I helped uh over 800 organizations invest in the platform. And it got to the point because I started at small grassroots nonprofits and then went up to a pretty big Catholic school, a lot of sophistication on their inind donations program. Um, I told the company I was like, "Default the inind option to have its own separate receipt so people don't mistakenly do that because some companies check check your prefab defaults, folks. >> You have to have a separate receipt for kind because it needs to say the inind language and it needs to not have a dollar amount because that is their responsibility. Many platforms should be doing this, but double check if yours is. >> 100%. >> Yeah, what a fabulous conversation and it's something that we probably need to actually even spend more time on because with this great wealth transfer and the passing of these these uh certain generations, there's a flood households of stuff that's got to find My garage is full of stuff, folks. My father passed away last January. We have so many toys. >> So much stuff. So, you know, I you know, my I have the arts background. I lead our arts and culture practice. And so in theaters, I think theaters are so good at starting um like sharing props in a community and starting Facebook groups where they share uh props and um different setting pieces and costume pieces. I would love to see more nonprofits doing that, sharing with each other because you can donate to each other, too. >> Yeah, absolutely. Well, as always, I love anytime we get in front of Christine Townsen. She's a manager with our friends over at YPTC, uh, your part-time controller. You can learn more about all of the different things that your part-time controller is doing. Uh, Justine comes from Texas, but today she's in de uh Denver um at a conference. And so, super cool, Justine, that you would pop out and pop on to the nonprofit show. Thank you, my friend. in depth. >> Absolutely. Thank you. I'll see you guys at Halloween. >> See you at Halloween. >> Yeah, we'll be Yeah, we'll be together. Tim San Antonio again, um, our intrepid co-host today. Um, I always love it when I get to to spend thought leadership time with you, Tim. So, thank you. Thank you very, very much. And thank you to our amazing partners. They include Bloomerang, American Nonprofit Academy, Staffing Boutique, JMT Consulting, Third Sector Company, Your Part-Time Controller, and the newest member of our sponsor family, Martis. We are so delighted that they join us day in and day out. We've done now more than 1600 episodes, and we're in our seventh year of broadcasting. As we end each and every episode of The Nonprofit Show, we leave with this message to stay well. So you can do well. We'll see you again. [music]