Last week our Chart of Accounts Grand Tour began to explore income accounts. We covered federated campaigns and membership contributions. Before we continue with income accounts for general contributions, let’s talk terminology.
Defining a Contribution
Contribution income goes by many names:
- In-kind donation
All of these terms can refer to essentially the same thing – a transaction in which a donor makes a voluntary, unconditional, nonreciprocal transfer of cash or other assets to an organization. “Nonreciprocal” means the party providing the resources does not receive commensurate value in return. “Unconditional” means there is no barrier the organization has to cross over to be eligible for the funding, such as raising a matching gift. “Voluntary” means, well, you know! As much as you may like to require a donor to make a gift, it just doesn’t work that way!
Contribution vs. Exchange
The heart of the matter is whether the income for the receiving organization is contribution (nonexchange) income or earned (exchange) income. This is a difficult area. For example, the term “grant” can apply to both contributions and exchange transactions (such as a contract to perform services that benefits a local government). Membership dues, as we explained in our last post, can also be contributions or exchange transactions. Special events often result in a combination of contribution and exchange income.
The accounting treatment for Form 990 purposes and for audited financial statements depends on whether it’s a contribution or exchange transaction. A recent Accounting Standards Update, ASU 2018-08, offers guidance in this area. We’ll cover ASU 2018-08 in another post.
When a Gift is Not a Gift
The IRS specifically disallows a tax deduction for gifts to benefit specific individuals. We have most often seen this scenario in churches, which tend to be close knit communities. If a donor gives money to help a specific person or family, that money should be accounted for as funds held for the beneficiary. The money would be recorded as a liability on the balance sheet until paid to or on behalf of the beneficiary.
The IRS also disallows a tax deduction to the extent a gift is in exchange for goods or services. Remember gifts by definition are nonreciprocal. That’s why you can’t sell t-shirts in exchange for a “donation.” The IRS has carved out an exception for goods and services with “insubstantial value.” For more information, see the section titled Quid Pro Quo Donations in the article at this link.
Donations, Contributions, and Gifts
The terms donation, contribution, and gift are used interchangeably. Often these terms are used to refer to a gift made in cash, but they could refer to a promise to give cash in the future. See “Pledge” below. Also see last week’s post where we talk about Membership Income.
The term “grant” can refer to funding provided by a private source, usually a private foundation, or by a government agency.
Often grants are:
- Awarded as a result of a grant proposal or application process
- Larger in amount than the organization’s typical gift
- Restricted as to purpose or when the funds may be spent
- Required to be spent in full by a certain date
- Given with a requirement to report on how the funds were used
But not always. For example, one organization we worked with received a $2,000 grant each year from a foundation associated with a local grocery chain. The money was not restricted in any way and no report was requested. In addition, the grant amount was smaller than many other gifts the organization typically received. Only the fact that the money came from a private foundation made it a “grant.”
“Pledge” refers to a promise to give in the future. A pledge results in income being recognized when the pledge is made, just like a cash gift. The difference is that instead of increasing a cash account, the pledge increases a receivable account on the balance sheet.
In-kind donations could be the subject of multiple blog posts, such as this one we wrote on How to Value and Record Volunteer Services. The main kinds of in-kind donations are gifts of services, gifts of tangible goods and gifts of free or reduced rent.
Accounts for Gifts, Grants and Contributions
Income accounts are needed to record the many kinds of contribution income. In theory, you could use one big account called “Gifts, Grants and Contributions.” But most people prefer to split out contribution income into various categories. Form 990 and Generally Accepted Accounting Principles (GAAP) also require organizations to present income by major categories. We’ll go into the specific contribution income accounts you may want to use and other strategies to track gift income in our next post.