February 7, 2023 •HoganTaylor
A new refugee resettlement charity had only just begun operating when its director realized something: She wasn’t sure how to value the many donations of clothing and household goods community members had dropped off. Was value simply the price her not-for-profit would charge if it sold the goods in a rummage sale or on an auction website?
Even established organizations may not know what value to assign tangible property donations — particularly if they don’t receive them very often. Here’s a quick rundown for startup and long-operating nonprofits alike.
Defining FMV
Assuming the property is related to the charity’s tax-exempt function, most tangible property donations are valued based on fair market value (FMV) — generally, the price that property would sell for on the open market. For example, if a donor contributes used clothes for a charity to distribute to refugees, the FMV would be the price that typical buyers pay for clothes of the same age, condition, style and use.
However, if the donated 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 isn’t eligible for commercial development.
Relevant factors and exceptions
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. But 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
- General market conditions.
Finally, there’s 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.
There are exceptions. Businesses that contribute inventory can usually deduct only the smaller of the inventory’s 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 isn’t included in the opening inventory, its basis is zero and the business can’t claim a deduction. Also know that with certain large donations of tangible property the donor is required to meet additional IRS requirements regarding value to claim a tax deduction.
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Understanding the value of tangible property donations is critical to preparing accurate financial statements. Donors will also generally need this information for their tax records, so be sure to include the value of donations in your donation acknowledgement letters.
How HoganTaylor Can Help
The HoganTaylor Nonprofit team of business advisors and CPAs is comprised of former CFOs, controllers, and industry experts with extensive experience providing the guidance organizations need to lean forward again in their leadership. If you have any questions about this content, or if you would like more information about HoganTaylor’s Nonprofit practice, please contact Jack Murray, CPA, Nonprofit Practice Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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