Someone on the board of our 501(c)(3) charity feels we are required to send a letter to each person who bought a ticket for our recent fundraiser to let them know the actual cost of the dinner so they can write off the "donation." The same person feels we have to notify silent auction winners of the actual value of the items they bought compared to the payment. Are we required by law to do this? I can understand having that information available if they ask, but to send out 300 letters...yikes!
Your board member is basically correct. This is the “quid pro quo” rule. In general, if a donor receives goods or services (other than certain low cost items of little value) in return for a contribution, the donor may deduct only the excess of the payment over the value of the goods and services received in return. The comparison is between the payment and the value received, not the cost to the charity of providing the value. Even if the dinner did not cost the charity anything, the donor would be treated as having received the value of the event. In an auction, the payment may be less than the value of the item purchased, in which case no deduction would be permitted because there was no payment in excess of the value received. But if the payment is more than the value, the purchaser is entitled to claim a deduction for the overage.
The Tax Code requires the organization to notify the donor of these amounts if the payment to the charity is more than $75, and the organization can be subject to penalties if it fails to do so. You are not legally required to notify the donor if the payment is less than $75, but most charities do so as a matter of good practice. You can deal with the dinner tickets by providing information in the solicitation request, but since you want to thank your supporters anyway, it isn’t much harder to tell them how much they may deduct for the contribution when you send the thank-you letter. (See Ready Reference Page: “Charities Must Set Value on ‘Quid Pro Quo’ Gifts.”)
Comments
In regard to the question of informing donors of the actual amount of their donation, over the 'cost/value' of the item, how can this be accomplished when the donors of the items themselves set the value--which can sometimes seem excessively low or high, and there is no actual 'receipt' for the cost? For instance, someone donates a limited edition collectible claimed to be worth $300, but there is no comparison since the item is no longer available for sale. Items can be researched on E-bay, etc, but values vary widely on items that are found due to many reasons and then the question is raised what value to use--the donor's, which may be incorrect, or the one found through research? Also, some donors prefer not to place a value on the item donated, even on a new purchase as they don't intend to write it off. Is there a standard way of establishing accepted values for items that do not come with a 'receipt' of purchase? Thank you. E.B. --via e-mail.
These issues of valuing donations to charity auctions are always tricky because there are two parties who want valuations, the donors of the items to be sold, and the purchasers of the items at the auctions.
For donors, the valuation usually does not make much difference. If they give services or use of facilities, like a week at their vacation home, they are not entitled to claim any deduction. If they give stuff, like collectibles, they are entitled to take a deduction for the lower of their tax cost or the fair market value. Even if stuff has appreciated in value and they have held it for more than a year, they may deduct only their tax cost because it is not being used in the charitable program of the organization. They are not entitled to deduct the higher value of the items if they are not used in the charitable program.
For the purchasers, they want to know if they are paying more than the fair value of the items. There is no single standard way to establish the value of items not readily available on the market. Research on E-Bay or in other types of catalogues would give an indication. The donor may have a good sense of the value. If you know someone in the field, you could ask for an estimate. Presumably you are not seeking the highest possible value because that would reduce the allowable contribution deduction for the purchaser. Since the value of most auction items is relatively low, in almost all cases less than the $5000 threshold that would require an independent appraisal for the donor's deduction (and set a value for the auction), there is not a huge area for abuse. A reasonable good faith estimate by the charity, based on the information available to it, should be adequate. --Don Kramer
If the food is donated and the auction items are donated, how do we calculate the "cost?" --T.P. via -mail.
The question for the donor/payor is the value of the goods or services received, not the cost to the charity. The cost, if purchased on the open market, is a pretty good indicator of the value, but if the goods or services are donated, there is no cost and the charity must make a good faith estimate of the value.
This is a very complex topic with many parts and pieces, so I want to address the questions regarding the successful bidder. The only way a bidder can claim a charitable deduction is if they know they were paying more than the fair market value of the item. In this situation, best practice is to have the FMV of the item listed in the auction booklet (particularly for experience items). The deductible amount is the difference between the bid and the FMV.
As for the question, "Do we really need to send 300 receipts?" The answer is why wouldn't you want to? This is a stewardship opportunity and an additional opportunity to educate these participants on your mission and how their contributions help advance that mission.
How does one value the "experience" of dinner with a celebrity? There is a concrete value of dinner for two but how does one value that experience? We have usually said that such items were "priceless" and considered the bid amount to be the value. That said, auction purchasers receive a statement when they make payment and the value is available on the signage. (I realize we should go back to a program even if it's separate from the "main" one.) Our event has many opportunities to give and all others get a hard copy ack letter. After the event, we send an email thank you with photos to ticketholders and they are added to our mail list, so they are communicated with in other ways.
I wouldn't be too hard on this person for not wanting to send 300 hard copy letters! To be frank, in 20 years of fundraising, I have had very few event attendees turn into annual fund donors. A better stewardship choice would be to employ your board to have meaningful conversations with as many people as possible at the event and report back to you. Then, ID individuals who might merit 1:1 follow up. I would also challenge organizations to have a strong mission message at the event that touches hearts. That's more powerful than any letter.
To cut corners, you can issue "receipts" directly at the event that list each item's fair market value and the amount paid. Sometimes silent auction bid sheets even can contain that information though better is to have one sheet with each item listed and a note at the bottom of the form explaining the total deductible value being the amount donated minus fair market value of items received.
I don't believe you're obligated to do the math for the donor, but listing the fair market value is helpful if not necessary, and having one sheet for them to submit to their accountant rather than a handful of bid sheets.
According to my reading of the IRS documents, the nonprofit is not obligated to estimate the Fair Market Value of items sold to a donor; that is officially the donor's responsibility, and they can substitute their own appraisals in place of the organization's suggested value. However, it is common practice that nonprofits know the retail values of items sold and can communicate that to their donors, so if you don't do it, you appear rude and unhelpful.
As far as best practice in fund development, there are generally few auction donors, in my experience with small organizations, who give beyond the fair market value of the items they purchase. So I make a special effort to note who's been especially generous (10 out of 100 donors let's say) and thank them specifically with a special post-event thank-you letter that contains the relevant information. Having said that, finding a reason to thank each of your 300 donors/buyers at your event helps them see it more as a donation than a purchase and develop a philanthropic relationship to your organization rather than just a consumer orientation.
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