When nonprofits host a charity auction, their goal is to facilitate fundraising for their cause while offering tax deduction benefits to auction item donors. However, navigating tax deductibility rules, especially for in-kind donations, can be complex.
Those new to nonprofit auctions may have questions about tax deductibility and how to value their donated items, among other concerns. This guide aims to address the following frequently asked questions for both nonprofit organizers and auction donors:
- Tax Deduction FAQs for Donors
- Which types of donated items are tax deductible for donors?
- What forms do donors need to file to receive auction-related tax deductions?
- Are tickets and auction purchases tax deductible for bidders?
- Tax Deduction FAQs for Nonprofit Organizers
- Is auction income taxable?
- What tax forms do nonprofits need to file with the IRS?
Let’s review the most important information, best practices, and tax forms that nonprofits and their donors should know to make their charity auctions a success.
Please note that, while this actionable advice is a helpful starting point, we are not tax professionals and this guide does not take into account your organization’s specific circumstances. Consult an accountant for situation-specific questions.
Tax Deduction FAQs for Donors
Which types of donated items are tax deductible for donors?
When it comes to charity auctions, cash sponsorships and donated in-kind items are tax deductible. However, donated services or the use of property are not tax deductible. For instance, if a local business donates $5,000 of sponsorship revenue to an auction or if a donor gives a piece of artwork worth $1,000, they could deduct the value from their taxes, but a vacation home rental would not be deductible.
However, note that there are regulations when it comes to claiming tax deductions on donated auction goods. The IRS stipulates that the deduction value for auction donors is based on what the donor originally paid for the item, not its current fair market value.
What forms do donors need to file to receive auction-related tax deductions?
There are a few key forms the donor must file to receive their auction-related tax benefit, including:
- An acknowledgment letter. The letter should contain the nonprofit’s name, item description, and a statement that no goods or services were given in exchange for the donation.
- Schedule A of Form 1040. When filing their tax return, donors need to itemize their deductions on this additional form. They should include charitable contributions along with all other itemized deductions.
- Form 8283 for noncash donations. This form is exclusively for donors who gave in-kind donations worth more than $500 for the charity auction. The donor will need to list a description of the item, its fair market value at the time of donation, and how the fair market value was calculated. Also, they’ll need to explain the original purchase price of the item and the date of the original purchase.
Additionally, donors should keep every receipt and record related to their auction donation in case the IRS needs to verify any information.
These are general IRS guidelines, so every donor should conduct their own research to determine if there are any additional forms to file based on their state and local regulations. Or, they can enlist the help of a tax expert.
Are tickets and auction purchases tax deductible for bidders?
Tickets and auction purchases are tax deductible only to the extent that the purchase price exceeds the fair market value of the item purchased. For example, if a raffle basket’s fair market value is $1,000 and a silent auction bidder purchases it for $1,500, they can deduct $500 from their taxes, as the surplus is considered a donation to the nonprofit.
As outsiders from the auction-planning process, it can be difficult for bidders to determine the fair market value of a ticket. To help donors with tax deductions, the nonprofit organizer should furnish the fair market value of the ticket on the ticketing page, as well as the fair market value of auction items within the catalog.
Tax Deduction FAQs for Nonprofit Organizers
Is auction income taxable?
In some instances, a nonprofit’s auction income is considered Unrelated Business Income (UBI), meaning it was generated in a manner unrelated to the nonprofit’s tax-exempt purposes. In this case, the nonprofit can expect to pay taxes on this income.
Several factors can impact this assessment, such as how often the organization hosts fundraising events and the type of items sold. For example, a nonprofit organization that hosts monthly hybrid art auctions that draw the attention of art collectors and enthusiasts could potentially face UBI tax concerns. This risk arises if these events closely mimic commercial art auctions in frequency and nature.
To avoid UBI concerns, nonprofits should limit the frequency of auctions, closely align the purpose of the auction with their mission, and focus on auctioning off donated items instead of curated or purchased items.
What tax forms do nonprofits need to file with the IRS?
Nonprofits should file the following forms to comply with IRS regulations and maintain their tax-exempt status:
- Form 990 series. These forms are the main tax forms nonprofits need to file to maintain their tax-exempt status. The types of Form 990 include 990-EZ, 990-N, and 990-PF. Nonprofits pick which to fill out based on their gross receipts. Form 990-N is for nonprofits with less than $50,000 in gross receipts, Form 990-EZ is for nonprofits between $50,000 and $200,000 in gross receipts, Form 990 is for nonprofits that have more than $200,000 in gross receipts, and Form 990-PF is for private foundations.
- Form 990-T. Nonprofits might need to file this supplemental form to report their auction-related UBI.
Nonprofits can discern the type of Form 990 that’s right for their needs with this chart from File 990:
Auctions are a profitable way for nonprofits to hit their fundraising goals by providing a fun way for donors to give back. By keeping critical tax information in mind, communicating openly with donors, and adhering to important IRS deadlines and regulations, any nonprofit can make its auction a profitable and enjoyable experience for everyone involved.