Please note that the following article is not meant to be taken as tax or financial advice. Everyone's situation is different, and your tax advisor should ultimately be consulted before making decisions.
To encourage the support of social betterment programs and charitable organizations, the U.S. government incentivizes nonprofits, businesses, and individuals alike with unique tax benefits. For qualified 501(c)(3) organizations, this means income tax exemption. And for donors and companies that support these charities, deductions on federal income taxes are available!
However, actually calculating your tax deductions, especially for in-kind donations , can be a bit of a challenge. From reporting the market value of your contributions to differentiating what is and isn’t tax-deductible, there are multiple factors to take into consideration.
To lend a hand, we’ve compiled this simple guide to navigating tax deductions for in-kind donations. We’ll cover:
Maybe you feel a personal obligation to support nonprofits that champion missions close to your heart. Or, your in-kind giving may be more strategic— donating helps businesses positively market their brand and increase customer loyalty.
Whatever your reason and whoever you may be, these insights can enable you to make the most of your in-kind contributions and save revenue. Let’s dive in.
Tax-deductible donations are typically gifts contributed to organizations that, in the U.S., the IRS recognizes as “exempt organizations.” These contributions can take a variety of forms, from money to products and services.
All of these methods of charitable giving are potentially eligible for tax deductions, but they must meet certain criteria. For example, your donations:
Contributions to registered 501(c)(3) organizations are potentially tax- deductible, based on your filing entity’s tax situation, but they aren’t the only organizations that qualify. If you’re unsure whether an organization has 501(c)(3) status, you can always take a look at the Tax Exempt Organization Search from the IRS .
After your donations meet these basic requirements, you can begin considering how to calculate and report them for tax purposes. This is where monetary and in-kind contributions start to differ.
For cash, checks, and other monetary donations, the process is more straightforward. This is because your cash gifts already have an explicit value. A dollar is a dollar.
However, from one-time cash donations to donated products to matched employee gifts , you should keep track of all charitable contributions throughout the year.
Maintain organized receipts of your donations, such as bank records or written acknowledgments from the nonprofits that receive your donations. When the time comes for reporting, the forms that you fill out will depend on whether or not you are filing as a business, and how your business is structured. For example:
For more information on how you or your business would report charitable contributions, check Tax Topic No. 506 from the IRS.
For in-kind contributions, companies typically can choose to write off products provided to charitable events or programs as either a marketing expense or charitable donation, whichever is easier or more advantageous. For example, classifying items as donations can help when wishing to communicate higher charitable giving totals.
There are a few more things to consider about in-kind donations in tax reporting. Namely, you need to determine the fair market value (FMV) of your donations. This is a calculation of the amount of money that a donated good—like a raffle fundraising basket full of your products or pallets of products—would reasonably be worth.
After all, you can’t very well declare “auctioned vacation experience” on your tax returns. The donor is responsible for determining and giving the IRS a tangible, calculable value to factor into your tax deductions. For physical products, retail value could work. For services like spa treatments, the amount eligible to be written off may be different and closer to what providing the service actually costs the business, since personal time cannot be deducted, but employee wages can. To learn more about fair market value and how to determine the FMV of your in-kind gifts, reference IRS Publication 561 .
Additionally, if total tax deductions exceed $500, Form 8283 (for non-cash charitable contributions) is required in addition to Form 1040. Take a look at the section “How do I report my in-kind donations for tax purposes?” for more information about completing IRS Form 8283.
That being said, there are some exceptions to these standards! For example, special rules apply to select types of charitable donations, like inventory and similar items, pre-valued.
But don’t be discouraged! There are hundreds of IRS resources that delve into the finer details of charitable donation reporting to help you make the most of in-kind donations.
Furthermore, if you’re a business professional managing a robust in-kind giving program, investing in a dedicated in-kind giving platform can streamline the entire vetting and reporting process through intuitive data tracking and record-keeping.
If you’re still buzzing with questions about the tax deduction potential of in-kind donations, you’re not alone! Tax deduction reporting is a complex process with unique standards, rates, and rules to consider. Let’s tackle a few of the most frequently asked questions regarding tax deduction and charitable donations.
The simple answer is yes, businesses can absolutely deduct charitable contributions (both monetary and in-kind) from their taxes. While you will not receive a deduction for the donation of services, physical products and costs associated with donated experiences are eligible for deduction.
The answer depends on several factors such as how you are filing, other deductions, and what kinds of donations are being reported. At the time of this article’s publishing, in-kind donations have a deduction ceiling of about 50% to 60% of gross adjusted income (AGI) for some businesses and most individuals.
Up to 100% of monetary donations can be potentially deducted, but actual allowances still depend on the classification of organizations you donate to and other factors on your own tax returns.
Take a look at the different kinds of deduction ceilings depending on how you file your taxes and to whom you donate:
For more information on your specific access to in-kind tax deductibility, consult the IRS website and your own financial/tax advisor.
If you want your in-kind gifts to qualify for tax deductions, you’ll have to do a bit of research in advance. For one thing, time and services do not typically qualify for a deduction. However, you can deduct additional expenses incurred during your hours of service—a great reason for businesses to promote employee volunteering !
Additionally, you’ll want to pay very close attention to the organizations you’re donating to. Once again, the following kinds of gifts are not eligible for tax deductions:
This is one of the reasons it’s so important to partner with the right nonprofit organizations!
To ensure that your business is sending its valuable in-kind contributions to qualified nonprofits, consider investing in DonationMatch’s turnkey donation matchmaking software . Our intuitive corporate giving platform allows you to be strategic about giving to nonprofits that are vetted and have upcoming event opportunities, maximizing your chances for fit with your goals and tax deductibility.
