Recognizing donor contributions is often more complicated than just providing a receipt. Many of our clients have questions about tracking income/donations from special events. There are issues with the charitable deduction being valid for only the amount that exceeds the value of the goods/services received, such as a dinner. There are also issues regarding the fair market value of goods/services that people and companies donate to make an event successful. Below are 3 questions and answers to help nonprofits be IRS-compliant.
- How do I properly record special event contributions, ticket sales, donated items, and the related expenses in my financial statements?
Nonprofit organizations must record different aspects of the events. For example, ticket revenue must be split between the value of the direct benefit, such as a dinner, and the contribution portion of the ticket sale. Additional expenses (in addition to the direct benefit to the donor) should be recorded separately, such as in an ‘event expense’ category. Expenses include items such as decorations, refreshments, and room fees.
Other expenses, such as promotion of the event, may fall under a fundraising category. Promotion may include items such as advertising, printing, mailing, and allocation of employee time for event promotion. If there is no charge to attend an event, then all expenses may fall into the fundraising category.
In the case of an auction, the amount received for a donated item is recorded as contribution revenue, regardless of the fair market value of the item.
The value of ‘party favors’ that are donated for guests of an event is recorded as contribution revenue to the organization, with the value reported to the guests as part of the direct benefit to donors. This reduces the deductibility of the ticket price.
- How and what do I communicate regarding the charitable contribution portion to the event donors?
The charitable contribution portion of an event ticket or donation must be communicated in writing, either on a ticket or on a receipt.
- What is fair market value?
The IRS says: “Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. If you put a restriction on the use of property you donate, the FMV must reflect that restriction.”
If the donation to the event was new or purchased close to the date of the event, the FMV is the price paid. If that is not the case, then consideration for the value includes the desirability, use and scarcity of the item. Three ways to determine the value of used property are sales of comparable properties, replacement cost, and opinions of experts (such as appraisers).
Make sure that accounting processes are set up correctly for handling donations and special events. Talk with a Salmon Sims Thomas tax advisor if you have questions.