So you are having an auction. Rev up the team to solicit those baskets of goodies, spa visits, vacations and game tickets, but do not forget about complying with tax laws. There are several steps your not-for-profit organization must take to fulfill your tax obligations and help your auction buyers fulfill theirs.
Putting it in writing
If you hold an auction to sell merchandise or services that have been donated to your charity, you should provide written acknowledgments to the donors of auctioned items valued at $250 or more. You will not incur a penalty for failing to acknowledge the donation, but the donor cannot claim a deduction without such proof. Include in your acknowledgment:
- The name of your organization and a description — but not the value — of the donated item;
- A statement and good faith estimate of the value of any goods or services that your organization provided in return for the contribution; or
- A statement that no goods or services were provided by your organization in return for the contribution.
It is the donor’s responsibility to substantiate the value of a donated auction item.
Certain rules for certain gifts
Donors of services (i.e. legal, beauty or personal chef services) may be surprised to learn that their donations are not tax-deductible as contributions; make sure you alert them to this in advance. The same goes for the donation of the use of a vacation home or use of other goods, equipment and facilities.
Donors of property, such as artwork or fine jewelry, can be told that tax law generally limits their deduction to their tax basis in the property (typically what they paid for it). They cannot deduct the current fair market value (FMV) of the donated property if it is higher.
Here is something else to be aware of: If you receive an item for auction valued at more than $500 — and within three years sell the property — you must file Form 8282, “Donee Information Return.” You also must provide a copy of the form to the item’s donor. Form 8282 must be filed within 125 days of the sale. If you fail to file the form, penalties could apply.
And motor vehicle donations call for yet another treatment. You must provide Form 1098-C to the donor reporting the actual amount received when you sell the vehicle, within 30 days of the sale. The donor’s charitable deduction is limited to this amount.
Related Read: “Raffles: Follow the Rules of the Game“
Disclosing the FMV of the items
A contribution made by a donor who also receives substantial goods and services in exchange (such as the item won in the auction) is known as a quid pro quo contribution. Under the IRS rules, you must provide a written disclosure statement to a donor who makes a payment of more than $75 that is partly a contribution and partly for goods and services received. These disclosures are often required in the context of charitable auctions when the bids exceed $75.
It is a wise practice to provide bidders with a good faith estimate of the FMV of each available item in the auction catalog or provide the FMV in the descriptions posted at the time of bidding. Include language notifying bidders that only the amount paid that’s more than the FMV is deductible as a charitable donation. This will satisfy the written disclosure requirements.
The failure to provide the written disclosures can result in penalties. However, you may be able to avoid the penalties if you can show your failure was due to “reasonable cause.”
Do not forget sales tax
Remember that your organization’s exemption from paying sales tax when purchasing items is not an exemption from collecting sales tax when selling items. Charitable auctions are basically sales, and most states require not-for-profits to collect sales tax on the items sold.
If your organization does not normally engage in merchandise sales, you may need to register with your state to collect sales tax. Some states allow exemptions for “occasional sales.” Research the state and local sales tax implications before you hold your event to ensure compliance. Your CPA can help.
Remember to comply
An auction can be an effective way to raise funds for your organization while sponsoring an engaging event. But do not lose sight of tax compliance.
For more information, contact Barbara Miller at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.