Putting a Value on Tangible Property Donations
If a donor suddenly offered your nonprofit a house, antique jewelry, or a shipment of retail inventory, would you know how to value it? Even if these gifts are rare, they can have significant financial and reporting implications. Establishing clear valuation procedures supported by broker-dealer audit services and professional accounting oversight helps your organization handle such donations accurately and remain IRS-compliant.
Determining Fair Market Value
In most cases, the fair market value (FMV) is the price a willing buyer would pay a willing seller on the open market. For example, if a donor contributes used clothing for distribution to disaster victims, the FMV is the amount buyers would typically pay for similar items in the same condition and style.
Restrictions can alter that value. Real estate that cannot be developed commercially, for instance, will have a lower FMV than similar unrestricted property. It’s important to document any limitations that could affect the valuation, as auditors and tax preparers will rely on that information when reviewing your annual financials.
If donated assets are unrelated to your nonprofit’s mission and you intend to sell them, valuation may differ. In such cases, the deduction is generally limited to the donor’s cost basis rather than FMV.
Three Core Valuation Factors
Several factors influence FMV calculations. To maintain accuracy and compliance, your organization should consider:
Cost or selling price: The donor’s original purchase cost or the actual selling price received by your nonprofit. This factor becomes less reliable the further removed the transaction is from the donation date.
Comparable sales: The prices of similar properties recently sold in comparable conditions. The IRS weighs these based on similarity, timing, and market circumstances.
Replacement cost: The expense required to replace or reproduce the item, adjusted to ensure a realistic relationship to FMV.
When inventory is donated, valuation rules differ. Businesses may only deduct the lesser of the inventory’s FMV or its cost basis. If the basis isn’t reflected in opening inventory, it’s treated as zero, and the business cannot claim a deduction. These nuances reinforce the importance of independent oversight through audit and assurance services.
The Appraisal Requirement
For tangible property donations exceeding $5,000, donors must secure a written appraisal to qualify for a charitable deduction. The appraiser must be a qualified professional—experienced in that specific asset category and independent from your organization. Your nonprofit should retain copies of these appraisals and related correspondence for both tax and financial reporting purposes.
Nonprofits that receive substantial or complex gifts should consult external advisors or auditors to verify compliance. Engaging experienced professionals can help confirm proper valuation, documentation, and reporting standards. Guidance from reputable organizations like the IRS Charitable Contributions Guidelines provides clarity on current requirements.
Financial Statement Considerations
Valuing donations accurately affects more than donor deductions. Your nonprofit must also record these gifts in its financial statements according to accounting standards. The recorded amount may differ from the donor’s deduction value, depending on how the asset will be used or sold.
Partnering with experienced accounting professionals familiar with Broker Dealer Audit Services ensures that financial statements reflect accurate valuations, enhance transparency, and maintain donor confidence. For additional reading, explore guidance from the Financial Accounting Standards Board (FASB).
Establishing consistent procedures for valuing tangible property donations supports both accountability and trust. With a clear understanding of IRS rules and professional oversight, your nonprofit can confidently accept high-value gifts while staying fully compliant.