Charitable auctions have long been lucrative fundraising and stakeholder engagement events. And the option of cost-effectively conducting online auctions has only made these activities more popular. But auctions also come with some tax compliance responsibilities, largely related to substantiating donations.
Acknowledging donations of auction items
If you use an auction to sell merchandise or services donated to your charity, you should provide written acknowledgments to the donors of the auctioned items valued at $250 or more. You won’t incur a penalty for failing to acknowledge the donation, but the donor can’t claim a deduction without such substantiation.
You can assist your auction item donors by providing a timely, written statement containing the name of your organization and a description — but not the value — of the donated item. The statement also should include:
- A description and good faith estimate of the value of any goods or services that your organization provided in return for the contribution,
- A statement that any goods or services that your organization provided in return for the contribution consisted entirely of intangible religious benefits, or
- A statement that no goods or services were provided by your organization in return for the contribution.
Remember, it’s the donor’s responsibility to substantiate the value of a donated auction item.
Other rules for auction item donors
Donors of services (for example, legal, beauty or personal chef services) may be surprised to learn that their donations aren’t tax-deductible. So make sure you alert them to this in advance. The same goes for the donation of the use of a vacation home or other property, including goods, equipment and facilities.
You also may want to inform donors of property, such as artwork or fine jewelry, that tax law generally limits their deduction to their tax basis in the property (typically what they paid for it) — they can’t deduct the current fair market value (FMV) of the donated property if it’s higher.
If you receive an item for auction valued at greater than $500 — and within three years sell the property — you must file Form 8282, “Donee Information Return.” You also must provide a copy of the form to the donor of the item. Form 8282 must be filed within 125 days of the sale. If you fail to file the form, penalties may apply.
And if you receive a motor vehicle as a donation, you must provide Form 1098-C to the donor reporting the actual amount received for the vehicle within 30 days of the sale. The donor’s charitable deduction is limited to this amount.
Substantiation requirements for winning bidders
A contribution made by a donor who also receives substantial goods and services in exchange (such as the item won in the auction) is known as a quid pro quo contribution. Under the IRS’s quid pro quo rules, nonprofits must provide a written disclosure statement to a donor who makes a payment of more than $75 that’s partly a contribution and partly for goods and services received. These disclosures are often required in the context of charitable auctions where the bids exceed $75.
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. So it’s a good idea to provide bidders with a good faith estimate of the FMV of each available item in the auction catalog. In the absence of a catalog, you can provide the FMV in the descriptions posted at the time of bidding. Include language notifying bidders that only the amount paid in excess of the FMV is deductible as a charitable donation. This will satisfy the written disclosure requirements.
The failure to provide the written disclosures can result in penalties of $10 per contribution, not to exceed $5,000 per auction. You can avoid the penalty if you can show your failure was due to “reasonable cause.”
As with most tax matters, you’ll be best off planning ahead to tackle issues related to a charitable auction. While the rules aren’t new, they are specific to each circumstance.
Sidebar: How to satisfy sales tax obligations
It’s important to remember that your organization’s exemption from paying sales tax when purchasing items isn’t an exemption from collecting sales tax when selling items. Charitable auctions are basically sales, and most states will require nonprofits to collect sales tax on the items sold.
If your organization doesn’t normally engage in merchandise sales, you may need to register with the state to collect sales tax. Some states allow exemptions for “occasional sales,” though. Research the state and local sales tax implications before you hold your event to ensure compliance. If you have any questions, give us a call. We are happy to help!