Author Archive for Hannah Kim

09
Jun
11

Charitable Auction Events

As we see more disasters frequently occurring around the world such as earthquakes, hurricanes and tornados, charities are thinking of new ways to quickly raise funds to help victims suffering from unexpected disasters.  One of these ways of fundraising is charitable auction events.  Donors may not have the cash to donate but have goods or services they can give to the charity.  An auction is a quick and easy way to convert these noncash donations to cash, raise awareness of the charity’s work to potential donors, and raise additional cash donations.  It may also be more appealing for a potential donor to purchase something for a good cause rather than just giving a straight cash donation.  Although this is a great idea to raise funds quickly, there are some rules that charities need to take into consideration and follow when throwing together an auction last minute.  Preparing ahead can save time and possibly penalties for the charity, and their donors down the road.  

First, it’s important for charities to separate purchasers from donors at these events.  Keeping good records at the auction event will make it easier later on to issue correct receipts.  A tax deductible charitable receipt according to IRS rules needs to be issued for all donations.  A written disclosure according to IRS rules needs to be issued to winners of the auction.  For the purpose of this blog, let’s call the “donor” the person who contributed an item or service for the charity to auction off.  Let’s call the “purchaser” the person who bid and won the item at the event.  The purchaser can become a donor if what he receives is less than the fair market value of his bid.  We will look at that example later. 

Second, keep in mind which donations are tax deductible and which are not tax deductible according to the IRS. Just because the charity receives something to be auctioned, it does not mean these are all tax deductible donations for the donors.  For example, if a donor wanted to donate his professional services or timeshare for the charity to use to auction, it may not be a tax deductible contribution for the donor.  The IRS states services donated are not a tax deductible event for the donor but the donor may be able to deduct the expenses incurred for the donation.  If a donor donated a tangible good to the charity to auction, that could be a tax deductible contribution as it meets IRS requirements.  And the charity must provide a noncash charitable receipt to the donor.

Third, remember that just because someone gives cash at a charitable event doesn’t mean that it equals a tax deductible donation.  Tickets purchased to attend the event are often not considered a donation.  The IRS generally considers the ticket price to be the fair value of the benefit received in attending the event.  Raffle tickets purchased are also not a donation.  According to IRS rules, raffle ticket purchases are not deductible for tax purposes at any event regardless if they win or not.  Charities should also look into their state rules related to gambling, which are applicable to raffle drawings, to see what additional regulations charities need to follow if a raffle drawing was held at the event.  These regulations vary from state to state.

Below are two examples of these issues at an auction, including both what would be considered a charitable donation and what would not be considered a charitable donation for tax purposes.

Example A:

Donor is a CPA and donates his services for consultation and tax preparation valued at $300.  The donor’s tax deductible amount is $0.  Since this donor is donating his service, this is not a tax deductible event for the donor.  He could deduct unreimbursed out-of-pocket expenses related to the services donated as it meets IRS standards.  The charity may acknowledge the out-of-pocket expenses incurred, but it is the donor’s responsibility to track the expenses.

Purchaser attends the auction event and pays $20 for the entrance fee.  He also bids for the CPA service at $500 and wins.  Of his total payment of $520 (20+500), the tax deductible donation amount is $200 because he paid this much over the price the service is valued at. The entrance fee of $20 is not a tax-deductible donation.  The charity must provide a written disclosure to the purchaser showing the total amount contributed less the fair market value of all goods and services received by the purchaser.  This difference is the purchaser’s donation to the charity.  For example:

Payment               $520
Less FMV goods received:  
  Entrance fee                (20)
  CPA tax service               (300)
Total tax deductible donation               $200

 The IRS can penalize the charity, if the charity does not provide this acknowledgement to the purchaser, and the donor may have penalties if they deduct non-charitable deductions on their tax return.

In this same example, if the purchaser bid for the service at $250, and won, his tax deductible amount is $0.  He received in benefit more than what he paid for.  Therefore there is no donation here.  The charity would still provide a written disclosure showing the purchase amount as well as the fair value of the good received, to the purchaser.  This follows the IRS requirement for written disclosures.  For example:

Payment               $270
Less FMV goods received:  
  Entrance fee                (20)
  CPA tax service               (300)
Total tax deductible donation               $(50) or $0

Example B:

Donor donates an authentic autographed basketball by Michael Jordon to the charity valued at $2,000.  The charity will give the donor a charitable receipt for this noncash donation without the value on the receipt but a detailed description of the donation.  The charity does not provide this donor the fair value of the basketball donated.  This follows the IRS requirement for charitable receipting for noncash gifts.  

Purchaser attends the auction and bids on this basketball for $2,500.  He also buys two raffle tickets $25 each, to put his name into a drawing for a $100 Starbucks gift card.  It’s his lucky night, so he wins the bid and the raffle drawing.  His charitable donation to the charity that is tax deductible is $500 since he paid this much above the fair value of the basketball.  Raffle tickets are not tax deductible and the value of the gift card is not deducted from the total charitable donation.  The charity must provide a written disclosure to the purchaser showing the total amount contributed less the fair market value of all goods and services received by the purchaser.  For example:

Payment             $2,500
Less FMV goods received:  
  Basketball             (2,000)
Total tax deductible donation                $500

 In this same example, the purchaser bid for the basketball at $2,000 and wins but does not win the raffle drawing.  There would not be any charitable donation since he paid the fair value for the basketball.  The charity would still provide a written disclosure showing the purchase amount as well as the fair value of the good received to the purchaser.  For example:

Payment             $2,000
Less FMV goods received:  
  Basketball             (2,000)
Total tax deductible donation                   $0

 While these examples are simplified, and charitable auction events are always unique, this should give you a good start of what things need to be tracked and be aware of when your charity decides to put together an auction event.  Remember to always provide appropriate acknowledgments and receipts according to the IRS rules.  Some additional resources are IRS Publication 1771, Charitable Contributions – Substantiation and Disclosure Requirements and IRS Publication 526, Charitable Contributions.

Advertisements



Archives

December 2017
M T W T F S S
« May    
 123
45678910
11121314151617
18192021222324
25262728293031

Categories

Awards

Online Accounting Degree blog feature