Hi Denise, what follows is a bit of a treatise, but the first paragraph is the tldr:
The common practice for determining the FMV of a stock in this context is average of high/low. This is the required method from the IRS for the donor to use for their tax deductibility, and the typical method for assigning a value to the donation in your CRM and your accounting books. You can use the actual value, ie the amount on your brokerage report that says how much the stock was worth when you got it, for internal valuation and even for accounting purposes, and there are reasons why you might do so, but it is less common. You may be tracking the proceeds value (how much you got when you sold the stock) in your CRM, and definitely in your GL, but that is not the value of the donation for development or the donor, it's for accounting. Dive in if you want more details:
Both the nonprofit and the donor need to determine the Fair Market Value (FMV) of a stock, for several purposes. The IRS provides that the amount a donor may claim as a tax deduction is equal to the average of the high/low of the stock on the date it was donated. For a long time, it was general practice to use this same number for two distinct purposes: the tax deduction for the donor, and the internal valuation for the nonprofit. A third value, the proceeds value, is the amount of money received by the nonprofit after selling the stock. At sale, accounting would recognize a gain or loss on the stock, depending on whether the stock sold for more or less than the internal valuation. However, this gain/loss is not charitable or relevant for Advancement.
Internal valuation is used for several purposes: to value the stocks as an asset on the organization's accounting books, to track balances when stock gifts are applied against a pledge, and for determining a donor's giving level for stewardship and recognition purposes.
It is generally the case that you can use average of high/low to determine FMV for any given day. This is the convention for many situations, and the IRS requires that the donor use this method for valuing their tax deduction. However, today, we have instant tracking of stock prices, and when you receive stock, your brokerage will typically report the value of the stock at the moment it was received. This opens up the possibility of recording this received value as the internal valuation.
Normally, the difference between received value and tax deduction are small. However, for volatile stocks or volatile market conditions, or even just for large contributions, there can be a large difference between the value of the donated shares at the moment of the donation and the avg hi/lo. Especially when applying stock gifts to pledge balances, this can result in the donor being severely over- or under-credited for their gift. Eg if they gave when the stock was high, but it crashed later in the day, not only will the donor be entitled to a smaller tax deduction, they will also owe more against their pledge.
This can lead to a situation where you either have to ask the donor to make up the difference, or where the nonprofit must make up the difference out of its own funds. It also leaves open the question about what to do about the pledge balance. If a donor wanted to give $2m to satisfy a pledge, but ended up getting recognized for only $1.8m because the stock price plunged late in the day, what do you do? Forgiving the $200k pledge balance could be seen as providing a benefit to an individual, especially assuming this is a legally enforceable pledge. You could write off the balance, but that doesn't really capture what's happening here either, and may have downstream implications for the size of reserves against bad pledges/bad debt. Similar impacts are felt in calculating lifetime giving, determining eligibility in giving societies, etc.
Using received value for internal valuation resolves this issue. The donor still has to use the traditional method for their tax deduction, but at least in terms of how the institution recognizes them, they get credit for what they gave at the moment they gave it, regardless of market fluctuations. If your institution also has a policy to immediately sell donated stock, and you have standing orders with your broker, the received value and the proceeds value will be the same, or nearly so. If accounting uses received value instead of avg of hi/o, there won't be much gain/loss to deal with on the accounting side either. That said, accounting can continue to use avg hi/lo, even if development chooses to use received value, and most advancement systems can accommodate storing both values.
Thank you,
Isaac Shalev
Data Strategy Expert
Sage70, Inc.
(917) 859-0151
isaac@sage70.com
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