Due to the various rules governing charity auctions, both large and small organizations need to make sure they have adequate auction procedures. It is important to understand and comply with these rules to protect donors and keep the IRS and state taxing authorities satisfied.

  1. The organization is required to send an acknowledgement of the donated item to the donor.
  2. If the donated item has a fair market value (FMV) greater than $250, the organization needs to include certain required language in the acknowledgment letter, including that no goods and services were received in exchange for the donation. This is required if the donor plans on taking a tax deduction.
  3. The value of the donated item should not be on the acknowledgment letter. The donor is responsible for this value and the rules can vary significantly.
  4. For those buying at auctions, if the purchaser spends more than $250 on an item, the organization should send an acknowledgement letter.
  5. This letter should include the purchase price of the goods and services received (not deductible) and how much is in excess of the FMV of the item (deductible).
  6. Donations for use of facilities or services, such as a vacation home, are not deductible as a charitable donation. Donors should consult with their tax advisors in regards to these donations.
  7. The organization is required to inform the donor of the tax deductibility of event tickets or purchases of $75 or more.
  8. Under the requirement noted in number 3 above, the organization is responsible for providing the purchase price of the goods and services received (not deductible) and how much is in excess of the FMV of the item. (deductible).
  9. If there is no excess amount, there is no deduction.
  10. If the donor is not informed, this can result in penalties to the organization.
  11. This is also a compliance question on the IRS Form 990.
  12. A simple way to provide this information to the purchaser is to place it on the program brochure. The program brochure should state that only the amount paid in excess of the FMV is allowable as a charitable deduction.
  13. An organization may be exempt from paying sales tax, but that does not make it exempt from collecting it.
  14. Most states tax the sales of merchandise by charitable organizations.
  15. Make sure that the organization is registered in the state where the auction is occurring. An organization may even be required to register and collect sales tax for even a one-time event.
  16. In the IRS Form 990, charitable auctions are reported as a fundraising activity and possibly on Schedule G, depending on certain reporting thresholds.
  17. Schedule G requires a detailed listing of fundraising events.
  18. The net income is generally excluded from unrelated business income.

For examples of acknowledgement letters, see IRS publication 1771: www.irs.gov/pub/irs-pdf/p1771.pdf

By Greg Pajon, CPA, Manager, gpajon@legacycpas.com