At MBS Accountancy, we understand that nonprofit organizations rely heavily on donor generosity to fulfill their missions. One increasingly common and valuable form of giving is the donation of publicly traded stock. While this type of contribution can be a win-win for both donors and nonprofits, it introduces accounting complexities that must be handled with precision. This guide outlines how nonprofits can properly account for donated stock in compliance with regulatory standards and best practices.
Why Donated Stock Matters for Nonprofits
Donated stock is a powerful tool in nonprofit fundraising. It allows donors to contribute significantly without affecting their cash flow and can offer substantial tax advantages. For the receiving organization, these gifts can boost financial resources and open up new avenues for support. However, these benefits come with a responsibility to accurately track and report the donation.
Initial Steps to Prepare for Stock Donations
Before your organization can receive and account for stock donations, a few foundational steps must be in place:
- Set Up a Brokerage Account: Open a brokerage account under the nonprofit’s name to receive transferred securities directly.
- Establish a Gift Acceptance Policy: Define clear policies regarding the types of securities you’ll accept, how you’ll handle them upon receipt, and any limitations or restrictions.
- Train Staff and Board Members: Ensure your finance and development teams understand the operational and accounting steps involved in processing stock gifts.
- Notify Donors Early: Provide detailed transfer instructions in advance to facilitate smooth and timely donations.
Recording Donated Stock in Your Accounting System
Properly recording stock donations is essential for compliance with Generally Accepted Accounting Principles (GAAP). First, determine the fair market value (FMV) of the stock, calculated based on the average of the high and low prices on the date the stock is received. Then, record the FMV of the stock as contribution revenue on the date of the gift. You should also create an investment asset entry on your balance sheet to reflect the donated stock. Ensure that you document the transaction thoroughly, maintaining brokerage statements and donor correspondence. Finally, send a donor acknowledgment letter, including the name of the stock, the number of shares, and the date received — but avoid assigning a dollar value to the gift in the acknowledgment.
Handling the Sale of Donated Stock
Most nonprofits choose to liquidate donated stock shortly after receipt. Here’s how to account for that transaction:
- Record the Sale Proceeds: Debit your cash account with the net proceeds from the sale.
- Remove the Investment Asset: Credit the investment account to eliminate the stock asset.
- Account for Gains or Losses: If the sale amount differs from the original FMV, record the difference as a realized gain or loss.
- Include Brokerage Fees: Any commissions or fees should be recorded as expenses related to the investment.
Compliance and Financial Reporting
Nonprofits must comply with IRS and GAAP requirements when receiving and selling stock donations. Follow Financial Accounting Standards Board (FASB) guidelines for valuing and disclosing non-cash contributions. Stock donations must also be disclosed on your annual IRS Form 990. To prepare for audits and ensure financial transparency, maintain detailed documentation related to stock donations. Additionally, reconcile brokerage activity with your accounting software monthly to prevent discrepancies.
Tax Advantages for Donors
Understanding donor motivations can help development professionals encourage stock donations. When donors contribute appreciated stock held for more than a year, they may deduct the full FMV of the stock from their taxable income. Moreover, they avoid paying capital gains taxes that they would otherwise owe if they sold the stock themselves. This method of giving can simplify charitable contributions, particularly at year-end, making it an attractive option for many donors.
Best Practices for Smooth Processing
Implementing best practices can reduce the administrative burden and increase donor confidence:
- Create a Stock Donation Form: Offer a form for donors to complete, including transfer details and intent.
- Thank Donors Promptly: Send personalized, timely acknowledgment letters to reinforce goodwill.
- Communicate with Finance Team: Ensure development and finance teams coordinate to track donations accurately.
- Consult Professionals: Work with accountants or advisors who understand nonprofit finance and IRS regulations.
Unlock the Power of Donated Stock
Donated stock can be a valuable part of a nonprofit’s fundraising strategy, providing increased resources and new opportunities for support. By following sound accounting practices, developing internal policies, and working with knowledgeable advisors, your organization can confidently accept and report these contributions. For tailored guidance and expert support, contact us. MBS Accountancy is here to help your nonprofit thrive through responsible, transparent financial management.