Insights: Article

Navigating your Charity Auction’s Reporting Requirements

By Anne Stoll

April 17, 2018

The spring gala—the event usually held in the spring by many charities as they celebrate another successful year. These types of events usually have multiple purposes. They’re used to highlight the good works of the charity, raise awareness, thank donors and honor those who have made an impact during the year. Often these galas include an auction. Auctions can be big moneymakers for a charity, but they also generate many reporting requirements that should be properly followed.

Reporting Auction Transactions
Auctions typically consist of two distinct transactions. First, the items to be auctioned must be either donated to, or purchased by, the charity. Then, the items acquired for the auction are auctioned off by the charity and thereby conveyed to the "winners" of the auction process.

For GAAP purposes, donated property is recognized as revenue and recorded at fair value at the time of receipt. When subsequently sold at auction, the difference between the amount received on sale and the fair value when originally contributed should be recognized as an adjustment to the original contribution. From a practical standpoint, many organizations will chose not to record the donated item when it is received and instead record the amount of the auction purchase as contribution income.  Unless the donation and auction fall in two separate fiscal years, this results in the same net contribution income.

For tax purposes, a charity should report both of these transactions on their Form 990. Let’s review how it would be reported.

Assume the charity has been soliciting donations for an auction and has received a gift basket of items with a value of $100. The person or business donating the gift basket should receive a receipt for their donation, discussed below, from the charity. The $100 gift basket is reported as a donation on the charity’s Form 990.

Then, when the auction takes place, if someone bids $150 and "wins" the gift basket, the charity is required to provide the bidder a receipt showing the $150 auction payment and the value of the item received. In this case, the bidder received the gift basket with a market value of $100 and made a donation of $50. On the charity’s Form 990, the $150 auction payment is reported as $100 of fundraising event revenue and the "extra" $50 is reported as a donation. The charity will also report $100 as a fundraising event direct expense, because the gift basket is no longer held by the charity.

So what happens if the winning bid was only $80? Since the market value of the basket was $100, the bidder paid less than the market value for the gift basket and are not entitled to a charitable deduction. Any receipt provided to the bidder should indicate that the gift basket was valued at $100, and the bidder paid $80, and no charitable deduction is allowed.

By reporting both transactions on the Form 990, the gross receipts from this auction item are $250—the donated gift basket at $100 and the bid amount of $150.The reporting on the Form 990 will show donations of $150, fundraising revenues of $100 and fundraising expenses of $100.

When it comes to auction items, it should be noted that all donations are not created equal. Donations of services and the partial use of property are not considered charitable donations. For example, the donation of a fishing trip with the CEO of an outdoor equipment manufacturing company or a weekend in a Hawaii timeshare may be great money making items for your auction but the donors are not allowed to take a charitable deduction for their contribution to the auction. For reporting purposes, the payment from the winning bidder is reported as fundraising revenue.

Contribution Receipt
For tax purposes, donors cannot deduct a charitable contribution of $250 or more unless they have written acknowledgement of the contribution from the recipient charity. This receipt must contain the following components:

  • Name of the charity
  • Either the amount of a cash contribution or a description (not the value) of a non-cash contribution
    • Donors are typically restricted to a charitable deduction equal to the basis they have in the donated item versus the fair market value. Therefore, the charity should only provide a description of the item as the donor will need to determine the amount they are able to deduct.
  • One of the following:
    • No goods or services were provided by the charity in return for the contribution
    • A description and good faith estimate of the value of the goods or services, if any, that the charity provided in return for the contribution
    • A statement that goods or services, if any, that the charity provided in return for the contribution consisted entirely of intangible religious benefits

Quid Pro Quo Receipts
The charity may have an additional "quid pro quo" reporting requirement if the payment for an auction item is more than the value of the item purchased and the total payment was more than $75. The IRS requires that the charity provide a receipt that includes the amount of the deductible contribution for federal income tax purposes and a good faith estimate of the value of the goods or services provided to the recipient in a manner that is reasonably likely to be noticed by the donor. Failing to provide this disclosure may be costly to the charity. The IRS penalty is $10 per contribution with an allowable maximum penalty of $5,000 per event. In the example above, the winning bidder will need to be provided a receipt with a good faith estimate of the value of the goods or services the bidder won, along with a notice that the amount of their charitable contribution is limited to the amount they paid over the value of the goods or services they received. Please note: The quid pro quo rules apply to any payment the charity receives of more than $75 that includes both a donation and receipt of goods or services by the donor, not just to a winning bidder of an auction (e.g. ticket to the gala).

State Reporting
Many states require charities to register with the state prior to soliciting contributions. Therefore, the charity should ensure they are in compliance with the registration requirements of the state in which they are incorporated, and any state in which an auction is conducted.

Since auctions are essentially the sale of goods and/or services from a charity to the winning bidder, the auction of donated or purchased items may be subject to sales taxes. Many states have exceptions that allow for one-time charitable events to qualify for a sales tax exemption. Any charity considering an auction should carefully review state sales tax requirements prior to conducting the auction.

Additional Considerations
Consideration should be taken when accepting unique items for an auction to ensure donated items are in line with the charity’s gift acceptance policy. The charity can assist volunteers and their own staff by having a gift acceptance policy that outlines what the organization is able to accept, thereby limiting the receipt of items that are not acceptable to the charity.

Certain donated items may have additional filing requirements. Donations of motor vehicles, such as cars, planes, boats, and motorcycles in most instances require the donor to file a Form 1098-C. In addition, if a donor provides a property donation valued over $5,000, the donor may request that the charity sign a Form 8283 acknowledging receipt of the item. If this item is subsequently auctioned, consumed or disposed of within three years of receiving the donation, the charity may need to provide the donor with a Form 8282.

As you can see, while an auction is a great opportunity to raise money for a charity, preplanning in securing donations and deciding which items the charity will accept is very important. It is also important that the charitable organization be aware of the IRS and state regulations to ensure that the earnings from an auction are not impacted by penalties from not following the rules. A charitable auction will go a lot smoother when those in charge know what needs to be done and plan accordingly.

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