Many non-profits experience a flood of last-minute donations at the end of the year. Although cash is easy to value, valuing noncash property donations is more difficult. If you are struggling to assign amounts to contributions — either for a donor or your own records — review this cheat sheet.
Price on the Open Market
Most noncash donations are valued based on their fair market value (FMV) — generally, the price that property would sell for on the open market. For example, if a donor contributes used clothes, the FMV would be the price that typical buyers pay for clothes of the same age, condition, style, and use.
If the property is subject to any type of restriction on use, the FMV must reflect it. So, if a donor stipulates that a painting must be displayed, not sold, that restriction affects its value. Restrictions on the use of real estate can dramatically affect the value of such gifts — for example, land that is not eligible for commercial development.
Three Relevant Factors
According to the IRS, there are three particularly relevant FMV factors. The first is the cost or selling price. This is the amount the donor paid for the item or the actual selling price received by your organization. However, because market conditions can change, the cost or price becomes less important the further in time the purchase or sale was from the contribution date.
Another factor is comparable sales, or the sales price of property similar to the donated property. The IRS may give more or less weight to a comparable sale depending on the similarity between the property sold and the donated property, time of the sale, circumstances of the sale, and market conditions.
Finally, there is replacement cost. FMV should consider the cost of buying or creating property similar to the donated item. However, the replacement cost must have a reasonable relationship with the FMV.
Inventory Exception
Inventory generally is subject to different valuation rules. Businesses that contribute inventory can usually deduct the smaller of its FMV on the day of the contribution or the inventory’s ‘basis.’
The basis is any cost incurred for the inventory in an earlier year that the business would otherwise include in its opening inventory for the year of the contribution. If the cost of donated inventory is not included in the opening inventory, its basis is zero and the business cannot claim a deduction.
It is important to note that even if a donor cannot deduct a noncash donation (including a piece of tangible property or property rights), you may need to record the donation on your financial statements. Such donations should be recognized at their fair value or what it would cost for you to buy the donation outright. Contact us for more information.