Auctions are known for two characteristics: they raise money (sometimes a lot), and they are a ton of work. Blue Avocado contributor and CPA Dennis Walsh gives us a complete, handy compliance guide, and even better: five sample forms to make sure your wording is right:
Charitable auctions have stood the test of time as a great way to leverage our consumption-oriented culture for the benefit of nonprofit efforts. And while auctions have been traditionally held at special events, online auctions have recently increased in popularity, making it easier for volunteers and allowing people to bid from their homes and over an extended period of time.
But whether an auction is live, silent, or online, there are compliance issues. This article presents an overview of key charitable auction compliance issues and how to use donor education as part of compliance. With this background, and the sample worksheets and forms included, you can more easily meet reporting responsibilities and reap the benefits with confidence.
Note: Various tax law and regulatory provisions affect charitable auctions, and these laws are subject to interpretation and change. Accordingly, competent professional advice may be needed by organizations, sponsors, and event participants. Except as noted, all section references are to the Internal Revenue Code and Regulations.
Before the auction
Charitable solicitation licensing
Most states have some form of charitable solicitation registration requirement for nonprofit organizations and professional fundraising firms. If your nonprofit is conducting the auction itself, in most cases you will not need to register (assuming you are not required to do so for other reasons).
Certain states also require disclosure of the organization's licensed status on solicitation materials and acknowledgments to donors. Rather than avoiding these requirements, organizations should embrace the added legitimacy that public disclosure of registered status provides. Click here for links to the rules in your state.
Auction donation acceptance policy
Consider adopting a written acceptance policy so that you can decline less appropriate gifts with less negative donor reaction. For example, you may want to state on your donation-solicitation form that you cannot accept live animals, vehicles, items with unusual storage requirements, items with significant transfer or handling costs, or items which you do not think can be readily sold at the auction.
Risk and insurance considerations
Like other fundraising events, auctions raise risk management concerns that should be addressed prospectively. Facilities and equipment should be set up with care and for persons of all ages and with disabilities in mind. Assign someone to watch for food or beverage spills and other hazards during the event.
Contact your insurance broker about your upcoming auction to be sure that appropriate coverage and premium is in place. If serving alcoholic beverages, be sure your policy includes necessary coverage. While adding a policy rider for special events is sometimes necessary, requiring the purchase of a separate policy may indicate that your insurer does not specialize in nonprofit insurance needs.
Documents to give donors
The rules are complicated for how much an individual can deduct from his or her taxes for an auction donation; a Tax Deductibility Handout for Auction Participants SAMPLE was developed for this article. There are different rules for tangible items than for real estate, for appreciated and unappreciated items, for arts, for services, and so forth. In general, if a donor asks about deductability, suggest they talk to their tax accountant. Even if you give them correct information, they may mis-remember it.
But you do need to know what documents to give the donor. Most importantly, be sure to give them receipts and acknowledgements. Just as you must give a written acknowledgment for cash donation of $250 or more, donors must have a written acknowledgment from the charity for each donation of non-cash property valued at $250 or more in order to claim a charitable deduction on their income tax return (see IRS Publication 1771 for exceptions and current year limits).
The written acknowledgment must show:
- Name of your organization
- Description of the donated property (but not the value)
- One of the following:
- A statement that no goods or services were provided in return for the contribution
- A description and good faith estimate of the value of any goods and services provided in return for the contribution (certain token items may be disregarded)
- A statement that goods or services provided in return for the contribution were limited to intangible religious benefits
Again, don't make an assessment of the value of donated property received. It is the donor's responsibility alone to substantiate the value of a non-cash contribution for income tax purposes, including obtaining a qualified appraisal when necessary.
And . . . an organization that does not acknowledge a contribution incurs no IRS penalty. But a thank-you, like a pancake, needs to be served up fresh. Send a prompt thank you by mail or email.
At the auction
Because auctions involve the sale of goods, remember that most states require nonprofits to collect sales taxes on the sale of goods in the same manner as for-profit enterprises. (Even if your state exempts nonprofits from paying sales tax when purchasing items, it may require nonprofits to collect and remit sales tax when selling items.)
However, exemptions from such requirements are common for certain fundraising activities (example: sales tax on hot food sold by volunteers at a youth sporting event event held fewer than six times per year). Be sure you determine if you need to collect state or local taxes on event admissions or auction sales.
An advantage to online charity auctions conducted through commercial providers -- such as BiddingforGood or MissionFish -- is that they will collect and remit sales tax for you. A disadvantage is that they charge; for example, BiddingforGood charges a $595 annual fee and 9% of gross sales.
Silent auctions often utilize bid sheets; here is a Silent Auction Bid Sheet SAMPLE that contains language related to tax deductibility so that bidders will have that information conveniently visible as they bid.
After the auction: accounting and reporting
Here is a Sample Auction Reporting Checklist for Nonprofits. Following is more detail on several points.
Auction Income and Unrelated Business Income (UBI)
Is auction income considered unrelated business income?
With certain exceptions, an organization that receives $1,000 or more per year of gross income from business activities unrelated to its exempt purposes must file IRS Form 990-T, Exempt Organization Business Income Tax Return, and will be subject to corporation income tax on its net income from such activities.
To be subject to UBIT, however, the activity must be regularly carried on. The Regulations provide that intermittent activities, including an annual fundraising event, are not regularly carried on, and therefore do not generate UBI (see Treas. Reg 1.513-1(c)(2)(iii)).
Events conducted more frequently may require closer evaluation. For example, a continuous auction held on the organization's website would likely meet this requirement.
Even if regularly carried on however, there are two UBIT exceptions often applicable to auctions and other fundraising activities. If an activity is conducted with substantially all volunteer labor, or the organization sells merchandise substantially all of which is donated, the activity will not be subject to UBIT (see IRC Section 513(a)). For this purpose, "substantially all" is generally regarded to mean at least 85%. (This is the area under which nonprofit thrift stores operate.)
If the activity is regularly carried on and not otherwise exempt from UBIT, and the organization bundles or mixes contributed items with purchased items prior to their sale, the organization needs to track the percentage of purchased items in the bundle/mix. If the annual sales of purchased items are more than insubstantial, then the activity is subject to UBIT (IRM 22.214.171.124).
And what about auction sponsorships? Is this advertising revenue and therefor subject to UBIT?
With a bit of care, you can avoid having to treat sponsorship revenue as unrelated business income. Two key areas:
a) Materials may include a sponsor's name, logo or product lines along with the sponsor's contact information and a link to their website (Treas. Reg Section 513-4(f)).
b) Your organization must not provide any type of endorsement or comparative information regarding the sponsor's products or services (IRC Section 513(i)(2)(A)).
What do we have to report to the IRS about the auction?
If you received a donation for which a Form 8282 was required, and you sell it (or dispose of it) within three years, you it must file Form 8282, Donee Information Return, within 125 days of the disposition and provide a copy to the donor. An exception applies to a single item of $500 or less that was part of a similar group of donated items, provided that the donor signed the statement in Section B, Part II, of Form 8283 and separately identified the item.
Keep copies of all your Form 8283 papers so that you can easily complete Form 8282 after an auction sale or other reportable disposition.
Special rules for vehicles: The sale of a donated car, boat, or airplane with a value of more than $500 must be reported to the donor on IRS Form 1098-C or an equivalent statement within 30 days of sale and must be filed with the IRS as well.
Auctions and your audited statements
Recording donated property: Under Generally Accepted Accounting Principles (GAAP), in general donated property is recognized as revenue and recorded at fair value at the time of receipt. When subsequently sold at auction, because such gifts in kind are, in substance, part of the same transaction, 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 (FASB Accounting Standards Codification (ASC) 958-605-25-20).
Some organizations prefer to record the amount of the auction purchase as contribution income and not record the donated item when it is received at all. If the donation and sale occur in the same fiscal year, this accounting convenience results in the same net contribution income. However, if the donation occurs in a separate fiscal period from the auction, doing so would result in the omission of contribution income and inventory from the financial statements.
Donated services -- such as a photography session or estate planning consultation -- are not recognized as revenue. Even if they meet the specialized skills requirements for the inclusion of volunteer time in financial statements, they would not meet the requirement that they would typically need to be purchased if not provided by donation FASB Accounting Standards Codification (ASC 958-605-25-16(b)).
Where Form 990 differs from GAAP
While an organization may generally follow GAAP for reporting of contributions on Form 990 as well, there are several important distinctions relating to donations of property for fundraising sale.
In contrast to GAAP treatment as a single contribution, property donated for fundraising and its subsequent sale are reported as separate and distinct transactions on Form 990. The difference between the amount realized from the sale of property at auction and the fair value at the time of donation results in a separately reported gain or loss from fundraising events.
Donation of the use of materials, equipment, or facilities is not recognized as income. Additionally, the donation of services is never recognized as income for Form 990 reporting. Rather, the proceeds from the subsequent auction of these types of items are recognized as income from fundraising events in the period sold.
For two helpful examples from the Form 990 Instructions, see Examples 1 and 2 on page 37 illustrating the reporting of auction related transactions. This author has also developed a sample checklist of auction related compliance items, including Form 990 related reporting, available here.
The following sample forms were developed for this article and can be downloaded:
- Acknowledgment of Non-Cash Donation SAMPLE
- Disclosure of Deductibility of Ticket Purchase SAMPLE
- Tax Deductibility Handout for Auction Participants SAMPLE
- Silent Auction Bid Sheet SAMPLE
- Auction Reporting Checklist for Nonprofits SAMPLE
The following IRS publications and forms are available online at www.irs.gov:
- Pub. 526, Charitable Contributions
- Pub. 561, Determining the Value of Donated Property
- Pub. 1771, Charitable Contributions - Substantiation and Disclosure Requirements
- Form 8282, Donee Information Return
- Form 8283, Noncash Charitable Contributions
Thanks to Adam P. Cohen, CPA, West Hartford, CT, Mig Murphy Sistrom, CPA, Durham, NC, and Pamela E. Davis, CEO, ANI/RRG, Santa Cruz, CA for their help in development of this article.
See also in Blue Avocado:
- I Survived an IRS Audit by Steve Zimmerman
- Tracking Volunteer Time to Boost Your Bottom Line: A Complete Accounting Guide by Dennis Walsh
- Accounting Procedures Manual Template by Deborah Connors
Dennis Walsh, CPA, is a regular contributor to Blue Avocado; his article Nonprofit Bookkeeping Test is one of the ten most viewed Blue Avocado articles of all time. Following a career in public accounting, he volunteers as a consultant to religious workers and exempt organizations, focusing on financial management, legal compliance, and organizational development. Dennis can be reached through the Micah Project. A version of this article was published by the Planned Giving Design Center.