Does your section 501(c)(3) organization hold fundraising auctions, where donors can walk away with gift certificates, spa packages, or other treats in exchange for generous contributions? Do your attendees pay for their own dinners at such events, or do certain folks sponsor tables? How about freebies at the door – does your organization give away mugs, T-shirts, or other items to its supporters? Most importantly, do you know and follow the IRS’ written charitable receipt rules for these transactions?
A. Contribution Disclosures: How Much is Tax Deductible?
Generally, section 501(c)(3) charities are required to provide timely written disclosure statements – as part of their charitable receipts — to donors who make “quid pro quo” contributions of more than $75. Loosely translated, this term means “this for that” — i.e., donors give money, and they receive something in return. Consequently, an organization may have to identify a reduced tax deductible contribution amount, depending on IRS valuation rules and certain “safe harbor” exceptions. Providing charitable receipts that contain accurate disclosure information is essential for tax compliance. If done improperly, a nonprofit may face an IRS penalty of $10 per contribution. Good receipting practices also should promote donor confidence that the organization is well run and sufficiently knowledgeable. So what should a responsible nonprofit do?
B. Winning the Bid; How Much Value?
In the auction fundraising example above, the nonprofit must give each successful bidder recipient a written good faith estimate of the good’s or service’s fair market value. What is fair market value, and how does one determine it? The IRS allows nonprofits to use “any reasonable methodology,” as long as it is done in good faith. The fair market value of property is often interpreted as what a willing buyer would pay a willing seller. Another benchmark is to look at sales for comparable goods or services. Fair market value is not what it costs the nonprofit to purchase a particular item. Thus, if a charity received donated goods or services intended for use at a fundraising auction, it may not in turn estimate their value at $0. Notably, items that are not of commercial quality – such as newsletters sent to supporters – are treated as having no measurable value for tax purposes.
C. “Safe Harbor” Contribution Exceptions: Table Sponsorships, Small Gifts, and Discounts
The table sponsorship example may fall within the IRS’ “safe harbor” exception for substantial contributions where the donor’s benefit is the lesser of (1) 2% or less of the contribution, or (2) $106 (for 2016, adjusted annually). In other words, the IRS recognizes that such donors’ intent is primarily to provide a significant benefit to the charity, rather than to receive a free dinner or other perk. Accordingly, table sponsorships may be an excellent tool for allowing donors to enjoy a full tax deduction for their contributions and event attendees to enjoy such beneficence. Good will all around!
There are two other IRS safe harbor exceptions. First, token items that are used in connection with fundraising efforts and whose value falls below specified dollar thresholds ($10.60 in 2016) and the donations of at least $56 are not subject to IRS disclosure rules. Second, free, low-cost (i.e., below the dollar threshold), unordered items distributed to patrons, that are either unsolicited or given with the patrons’ express consent are likewise exempt from disclosure rules. Another safe harbor area is for “membership” package benefits that can be exercised frequently, such as gift shop or admission discounts.
D. Informed Donors As the above examples demonstrate, tax compliance for charitable receipting depends on a careful evaluation of each fundraising event or practice. Assistance may be appropriate and necessary, such as from legal counsel, an accountant, or a person who can responsibly value the goods or services involved. Once a section 501(c)(3) nonprofit has made the proper determination, then it should inform its donors that either (1) the tax deductibility of their donations is reduced by the amount of an identifiable, reasonably valued tangible benefit given in return (if not covered by any safe harbor), or (2) their contribution is fully deductible.
Michael P. Mosher serves as Of Counsel at Mauck & Baker. This article appeared previously in the June 2011 edition of Mosher & Associates, LLC Newsletter.