Recording the Receipt of a Stock Donation
The end of the year is close and, hopefully, donations are pouring in. Donating stock instead of cash to a nonprofit or church may have an additional benefit for the donor. (Please note, I am not a tax expert and am not giving tax advice. Your donors should seek the advice of their local CPA to see if this could be a benefit to them.) IRS regulations allow for stock donated to be deducted by the donor at the market value instead of the stock price when it was purchased. This means that if a donor has 100 shares of stock he bought 5 years ago at $10 per share, and the stock market value is $50 per share when he transfers it to your organization, he would be able to deduct a charitable contribution of $5000.
In contrast, if he sold the 100 shares of stock, he would have to pay capital gains tax on the $4000 gain. Assuming a 20% tax rate ($800), he would only have $4200 to donate ($5000 less the $800 taxes). If a nonprofit is going to encourage their donors to speak to their tax specialist about this option, there are a couple of things that should be done.
First, the organization needs to have an investment account that stock may be transferred into. Secondly, the governing body should devise a policy about what to do with any stock donated. Will it be sold immediately and the cash invested with other funds, or will the stock be held until the cash is needed for its stated purpose? Who is responsible for investment decisions? Finally, procedures must be put in place to assure the donation is acknowledged on a timely basis and properly in accordance with IRS regulations on donor acknowledgements. For more information on donor acknowledgements, check out Church Accounting: The How-To Guide for Small & Growing Churches.
Now to the nitty-gritty. To record the receipt of stock, you will want to set up an invoice under the donor’s name for the full market value of the stock. If the stock was used to pay a pledge that has already been entered, you can skip this step.
If you are using QuickBooks, go to Receive Payments. Enter the amount as the full market value. If there were brokerage expenses, we will record those later as the donor records need to reflect the value before any transaction expenses. You may add a PMT METHOD called Stock. The value of the stock on the brokerage report may be slightly less than the pledge due to a change in value from the time the donor authorized it to the time it was recorded in your account. If so, QuickBooks will ask if you want to leave as an underpayment or write off the extra amount. If it is a small amount, choose the write off option. Save this payment, and your donor records will be up to date.
Next you will need to go to Make Deposits. Change the Deposit To option to the investment account the stock was transferred into. After selecting the amount from the Payments screen, you can adjust the deposit for any transaction fees. Enter the fee amount as a negative number on the next line. You will also need to assign a general ledger account number to the adjustment under the FROM ACCOUNT. I usually prefer to use the same donation account the invoice/pledge was recorded to in order for the net donation to be correct. Save the deposit.
If your organization sells the stock, make a journal entry to record the transfer
1100-Checking Account $4800
6381-Bank Service Charges* 200
1120-Investment Account $5000
*If the organization does a number of stock sales, set up an Other Expense account for Investment Transaction Fees.
Now the Statement of Financial Position (Balance Sheet) and Statement of Activities (Income Statement) reflects the donation properly. In the next blog post, I’ll show how to record realized and unrealized gains and losses for investment accounts.