Gifts-in-Kind Schemes: FAQ

What are gifts-in-kind donations?  Gifts-in-kind (GIK) are noncash donations made to a charity.  Common examples of GIK are food, clothing, prescription drugs, equipment, and medical supplies.

How are gifts-in-kind used?  Charities give the products directly to those in need or to other charities for redistribution.  Charities may also sell the goods and use the proceeds to further their charitable mission. Certain types of charities, such as thrift stores and relief organizations, may receive significant amounts of GIK.

Are charities required to report gifts-in-kind like they report cash donations?Charities are required to report their donations and program expenses on filings with the IRS (the Form 990) and state agencies.

What’s the problem?  Not all charities accurately report gifts-in-kind.  False GIK reporting can be used to make an organization appear more financially successful than it is and to hide high fundraising and administrative costs.  This may increase an organization’s ranking by charity watchdogs, and justify higher employee compensation. False GIK reporting can happen in several ways.  A charity might mark up the value of goods (for example, medicine worth $.05 a pill is valued at $50 a pill), or assign some value to goods that are actually worthless (for example, broken machines).  In other cases, charities take credit for the value of GIK even though they merely acted as a “pass-through” or “middleman” by just passing the goods from one organization to another without having ownership of the goods. The following chart illustrates one version of a GIK scam:

The pie charts below illustrate the huge impact GIK donations can have on a charity’s numbers. XYZ Charity, Inc. takes in $10,000,000 in cash donations. Of that amount, the fundraiser receives $7,000,000 and $2,000,000 goes to XYZ’s overhead expenses. That leaves $1,000,000 for the charity’s programs.

When XYZ adds in $30 million in misrepresented GIK, the charity looks much different. The charity looks much bigger–now it’s a $40 million charity, not a $10 million charity, and it looks like 77.5% of a cash donation goes to the charity’s programs, when in fact only 10% of your dollar goes to programs.

Do all charities use gifts-in-kind this way? No. Many charities report GIK donations correctly. When used and reported as intended, GIK can be an important part of a charity’s programs. Worthy causes get needed supplies, donors may get a deduction, and items that might otherwise be discarded are put to good use.

What can a donor do? Do your research and ask questions!

Research the charity to see how it describes its programs. Go to the charity’s website, check on Facebook and other social media, and do a Google search. Make sure that the charity’s program described to you and that you want to support is one that the charity really conducts.

Review the charity’s financial information and make sure you are comfortable with how it will spend your money. Ask the charity, or review its Form 990 and financial reports to see how the organization receives and spends its money. Schedule M of the Form 990 should contain information about GIK. The Form 990 and/or financial reports should be available from the charity, online with your state, or at www.guidestar.org.

Be wary if the charity reports high GIK numbers. If you have questions about what is being donated and how it supports the charity’s mission, ask the charity yourself. For more information about GIK and to learn how to review a charity’s financial reports for signs of a potential scam, see GIK Schemes and How They Can Be Used to Deceive