Non-cash Budget Items

Depreciation
Depreciation is a way to spread the expense of a large capital purchase over the number of years it will be in use, and this expense should be included in your budget. Your organization's board should approve a Capital Purchases and Capitalization Threshold Policy that covers how it budgets for and approves capital purchases (equipment or furniture with a useful life of more than one year) and establishes a cost above which a purchase should be capitalized as a fixed asset rather than expensed outright. See the “Capital Purchases and Capitalization Threshold Policy Sample ” elsewhere on this website.

For example, a board may set the threshold amount at $1,000, meaning that individual purchases of small tools, equipment, or furniture that cost less than $1,000 are fully expensed in the current fiscal year when purchased. When a purchase equals or exceeds the established cost threshold, and it will be in useful service for more than one year, the item should be capitalized - that is, recorded as a fixed asset rather than an expense. The item will then be depreciated over the number of years determined as its useful life, which affects the annual budget.

• Create or update a depreciation schedule (or fixed asset schedule) that calculates the amount of depreciation that needs to be included in the operating budget going forward. See the “Fixed Assets-Depreciation Schedule Example ” elsewhere on this website.

• Consistently including depreciation in a balanced operating budget will provide the cash needed to replenish depleted assets by bringing in cash revenue to cover a non-cash expense (depreciation). Not adequately budgeting for depreciation could eventually have the effect of eroding the organization's net assets.

In-Kind Contributions
Your organization may be fortunate enough to attract in-kind contributions comprising donations of professional services or other goods and services for free or at a discount. It is wise to budget for and report these contributions, when they can be adequately documented, since it gives a truer picture of what it takes to do what your organization does.

• In-kind contributions are net-zero. That is, the contribution and the expense are equal, so they do not affect the bottom-line net revenue, but they do increase the magnitude of the revenue and expenses. When budgeting for in-kind contributions, it is extremely important to ensure that the in-kind expenses are budgeted as well as the revenue. It would not be a good thing to balance a budget with non-cash revenue covering cash expenses.

• Documentation for in-kind contributions can be in the form of a letter from the donor or a bill from a vendor showing the full or discounted amount of the donated goods or services provided, etc.

• Although volunteer hours do not qualify to be reported as revenue under GAAP (Generally Accepted Accounting Principles), they may be valuable or indispensable to the implementation of your organization’s mission. However, this important contribution can be included in a narrative note in your organization's audit, and in section O of the 990, describing the role of volunteers and the impact of their hours, and perhaps an estimated value for their hours. See “Value of Volunteer Time ” updated annually by Independent Sector.

• The value of an in-kind donations for other than services is reported to the IRS by the donor, not the recipient  organization. A good example is the donation of stocks instead of cash.  Thank you letters from the receiving organization should only describe the service or goods and should not mention a dollar value.

•  In the case of donated professional services, the donor must possess the specialized professional skills being donated in addition to the previous requirement. See “IRS Publication  1771 Charitable Contributions-Substantiation and Disclosure Requirements” for further information.