Understanding How Donor Gifts with Benefits Impact Nonprofit Revenue

In the world of nonprofit organizations, fundraising plays a crucial role in supporting their mission and operations. One of the most common ways that nonprofits receive funding is through charitable donations from individuals and businesses. As a nonprofit, it’s essential to understand the different types of donations and how they should be recorded and recognized in your financial statements. This article will focus on in-kind donations, which are gifts of goods or services instead of cash, and explain how they are accounted for in nonprofit accounting.

What is Exchange Value in Nonprofit Accounting?

Exchange value in nonprofit accounting refers to the fair value of goods or services that are exchanged between a nonprofit organization and a third party. In other words, it is the value of what the nonprofit receives in return for what it gives.

For example, if a nonprofit sells merchandise to a customer, the exchange value is the price paid by the customer for the merchandise. If a nonprofit provides a service, such as consulting or training, to a client in exchange for payment, the exchange value is the fair value of the service provided.

If a public television station receives a $100 cash donation and gives a $5 tote bag to the donor, the exchange value of the transaction is $5. This is because the donor received a tangible item with a fair market value of $5 in exchange for their donation. The contribution value, on the other hand, is $100 because that is the amount of cash that was donated to the organization.

In nonprofit accounting, it is important to distinguish between exchange value and contribution value in order to properly record and report revenue. The exchange value must be recognized as revenue in the accounting records of the nonprofit organization, while the contribution value is reported separately as a donation.

In this example, the public television station would record the $100 cash donation as a contribution revenue and the $5 tote bag as an exchange revenue. This way, the nonprofit can accurately track its revenue streams and ensure compliance with accounting standards.

Exchange value is important in nonprofit accounting because it helps the organization to properly record its revenues and expenses, as well as to determine the fair value of any assets or liabilities related to the exchange. It is also a key factor in determining whether an exchange transaction should be recorded as a contribution or as revenue.

How Do Donors Account for Exchange Value on the Tax Return?

The donor can claim the $100 cash donation as a tax deduction on their taxes, but they cannot include the value of the $5 tote bag as part of the charitable contribution. According to IRS guidelines, if the donor receives any goods or services in exchange for their donation, they must reduce the amount of their contribution by the fair market value of the goods or services received.

In this case, the donor would need to subtract the value of the tote bag, which is $5, from their $100 cash donation, resulting in a deductible contribution of $95. The nonprofit should provide the donor with a written acknowledgment of their contribution that includes the amount of the donation and a description and good-faith estimate of the value of any goods or services provided in exchange.

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 13 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

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