Nonprofits of all sizes often receive donations of tangible property, from clothing and household goods to artwork and equipment. But determining how to value those items isn’t always straightforward. Whether an organization is newly formed or well established, uncertainty around valuation can create challenges for accurate financial reporting and donor documentation. Understanding the basic rules can help nonprofits assign values with greater confidence and consistency.
How fair market value is determined
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 said 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 — for example, land that isn’t eligible for commercial development — can dramatically affect the value of such gifts.
Key valuation considerations and special rules
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 is from the contribution date.
Another factor is comparable sales, or the sales prices of properties 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 to these factors. 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, note that for certain large donations of tangible property, the donor must meet additional IRS requirements regarding value to claim a tax deduction.
We’re here to help
Assigning the right value to tangible property donations requires more than a quick estimate — it calls for understanding fair market value, the factors that influence it and the exceptions that may apply. By taking a thoughtful, consistent approach to valuing noncash donations, nonprofits can strengthen their financial reporting, support donors’ tax compliance and reduce the risk of scrutiny down the road. Reach out to us for help navigating these requirements to ensure donated goods are appropriately valued.
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