As seen in the Boston Business Journal
You're at your favorite charity’s annual gala, strolling through tables of auction items when you spot it – the most fabulous handbag in the richest shade of navy you've ever seen. Or, maybe it is that Taylormade M2 driver you’ve been looking to get, the one that promises to unlock exceptional distance for your long game.
You know you just have to have it. So, you put in your bid and hover nearby to see who your competition will be for the evening. Sound familiar?
A great auction can be thrilling – whether silent, online, or live. Knowing that the proceeds go toward supporting a mission that positively impacts our community makes the experience even better.
However, there are important tax compliance guidelines surrounding these transactions that should not be overlooked.
These are of particular interest to not only donors or bidders at charity auctions, but also board or committee members of the not-for-profit organizations conducting these events. What do stakeholders need to know to be cognizant participants in the auction process? Written acknowledgements and disclosures
Written acknowledgements should be provided to the donors who provide auction items that are sold to raise funds for your charity, similar to what you would provide for cash donations of $250 or more. It’s the donor’s responsibility to substantiate the value of a donated auction item. Without this, the donor can’t claim a deduction on their taxes.
The written acknowledgement should contain the following:
- name of your organization,
- donation item description (without disclosing the value),
- what the donor received in exchange for the donation (if anything),
- description and value estimation for any goods or services your organization gave in return for the contribution,
- statement that what was provided in return for the contribution consisted entirely of intangible religious benefits, or,
- statement that no goods or services were provided by your organization in return for the contribution.
There are also required written disclosure statements that should be provided to winning bidders, which include:
- the amount of the purchase price that’s deductible for federal income tax purposes is limited to the amount that exceeds the fair market value (FMV) of the auction item, and,
- a good-faith estimate of the FMV of the goods or service the bidder received.
Failure to satisfy the written disclosure requirement can result in penalties of $10 per contribution, not to exceed $5,000 per auction.
To take a charitable deduction, a donor must be able to show that he or she knew the value of the item was less than the amount paid. It’s a good idea, therefore, to provide bidders with the FMV information in the auction catalog or descriptions posted for each item.
What you may not know
Two important things:
- Service donations are not tax deductible. This also rings true for property donations, for vacationing purposes or otherwise.
- Tax law generally limits the deduction for fine arts. People tend to think they can claim a charitable deduction for the current FMV of these donations, but more likely they’ll be limited to what they originally paid for it.
Be sure to communicate these guidelines to anyone donating a service or property to ensure they are aware.
Quid pro quo
Quid pro quo contributions are those made by a donor in exchange for goods and services. In these situations, the IRS dictates that nonprofits should supply a written disclosure statement to a donor paying more than $75 that it is partly a contribution, and partly for goods and services received.
You must fill out Form 8282, Donee Information Return for auction items valued at greater than $5,000 that are paired with an appraisal summary, or donor’s Form 8283, Noncash Charitable Contributions. Keep in mind:
- You must provide a copy of the form to the donor.
- Form 8282 must be filed out within 125 days of the sale to avoid potential penalties.
Plan ahead to make sure you have all of your bases covered for your next charitable auction. Be sure to keep your donors informed, and have the proper guidelines and forms readily available.