Survive Your Auction by Learning These 3 Critical IRS Rules
Auctions are one of the ultimate donor data management challenges. You’ve got IRS regulations, specialized software requiring data integration, and event data tracking. In this post, we’ll focus on IRS rules that impact donated items, auction purchases, and event ticket donations.
1) Donated Items
Let’s start with the auction items that are given to you during your procurement process. You’ll probably end up with a combination of tangible items (e.g. gift basket), services (e.g. donated massage) and what are called partial use gifts (e.g. use of a vacation home). Only the tangible items are tax deductible for the item donors, though you’ll want to acknowledge every auction item donation you receive.
Because a tax-deductible gift is defined as a tangible item, gifts of services are not tax-deductible donations. If a donor gives you the generous gift of their time, you cannot issue them a tax receipt, though you should certainly send them a letter thanking them for their generous donation.
There’s another type of in-kind gift that is not tax-deductible: a partial use gift. This is a gift where your organization is allowed to use a donor’s property, but the donor retains rights to the property. If a donor lets you use their vacation home for a weekend as an auction prize, that is a partial use gift, and not tax-deductible. If the donor donates their vacation home to your organization, that is a tax-deductible gift.
Even though you’ll only provide a tax receipt for tangible items, ask all donors to provide you with the fair market value of the items they donate. This will be important for creating your auction program, as it’s important to disclose the fair market value to potential bidders.
2) Auction Purchases
Purchases made by auction bidders are also subject to IRS regulations. IRS quid pro quo regulations specify that donors cannot receive a benefit in exchange for a charitable gift. Thus, many auction items will not be tax-deductible at all.
Auction purchases are tax-deductible only in cases where the bidder donates above the fair market value for an auction item, and only the portion of the bid above the fair market value is tax deductible. This is why it’s important to disclose fair market value in your auction program. This helps donors understand immediately whether any portion of their bid will be tax-deductible.
Keep in mind that the fair market value is dependent on the value of an auction item were it to be purchased on the open market, not the cost to your organization. The fact that an item was free to you does not mean it has no value.
Keep in mind that though partial use or service donations are not tax-deductible for the person who donated the item, this rule does not apply to bidders. For example, a donation of a weekend at a vacation home would not be tax-deductible for the original donor, due to partial use rules. However, if the winning bidder pays above the fair market value of the weekend at the vacation home, then the amount paid over market value is tax-deductible for the bidder.
3) Event Ticket Donations
Event ticket donations are also subject to IRS regulations pertaining to quid pro quo. If your auction requires a donation to attend, then only a portion of the ticket price will be tax deductible. The benefit received by the donor (entertainment, food and beverage, etc.) is not tax deductible. The non-tax-deductible portion of a gift is called the premium. The amount of the premium is equal to the fair market value of the donor’s experience.
Keep in mind that the fair market value is the cost a donor would pay for an equivalent event experience, not the actual cost to your organization. For example, it’s common to procure donated wine to serve at nonprofit events. This is wonderful generosity on the part of the vintner, and a great benefit to your organization. However, it doesn’t change the fact that your donor is still drinking a glass of wine with a fair market value equal to $5.
How do you calculate the premium for each donor? Total the fair market value of the elements of the event that benefit the donor, e.g. venue rental, food and beverage, entertainment, and parking. Then divide the total amount by the number of attendees you anticipate.
There are a lot of complexities involved in managing auction donations. Taking time to familiarize yourself with IRS rules will make this process a lot easier! If you’d like to dig deeper, check out IRS Publication 526, and check out Fundraising Nerd’s webinars, Volunteers and Events: Managing Engagement, and Gifts: From Simple to Complex.
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