Deducing What’s Deductible: Is your nonprofit properly reporting special charitable events?

It can be challenging to properly set and report the value of charitable donations to the Internal Revenue Service (IRS) when it comes to charitable activities such as galas, golf outings, bazaars, shows and other events that provide an associated benefit for donors.

Charitable events raise funds in two ways: in profits derived from the sale of tickets or other privileges or benefits and through the use of the affair as a way to solicit gifts in combination with the sale of the tickets or other benefits. In the latter case, the sale of the privilege or benefit is combined with the solicitation of a gift or donation in addition to the value of the admission or privilege.

Return Benefits

The IRS is concerned with misleading literature that draws taxpayers to the conclusion that a payment is tax deductible when, in fact, it is a purchase and not a contribution. Additionally, the IRS wants to ensure that the fair market value of the “return benefit” is being properly reported.

Code Section 170 allows for a charitable contribution in cases when there is a gift to or for the use of a charitable organization. By definition, a gift is a gratuitous transfer without any anticipation of return benefit other than assisting the organization in carrying out its good works.

As a general rule, if a transaction involving a payment involves the purchase of an item of value (such as at a charity auction), whether it be tangible (such as merchandise) or intangible (such as the right to attend an event), the presumption arises that no gift has been made for charitable contribution purposes until such time as the return benefit has been measured.

The only portion that can be treated as a gift or charitable contribution is the portion over the fair market value of what is received in exchange. To establish this, the amount attributable to the purchase of the ticket or other privileges and the amount solicited as a gift should be estimated in advance of the solicitation. The respective amounts should be stated in the solicitation and clearly indicated on the ticket, receipt or other evidence issued in connection with the ticket.

The full fair market value of the admission and other benefits or privileges must be taken into account. If the affair is reasonably comparable to events for which there are established admission charges – such as concerts, athletic events, etc. – the established charges should be treated as fixing the fair market value. Only the amount paid over and above the fair market value can be designated as a charitable contribution.

In regard to one misconception, the fact that the full amount or a portion of the payment made by a patron is used by the organization exclusively for charitable purposes has no bearing on the determination to be made on the value of admission or other privileges and the amount qualifying as a contribution.

Additionally, the mere fact that purchased tickets are not used does not entitle the patron to any greater charitable deduction than would otherwise be allowable. The test of deductibility is not whether the right to admission is exercised but whether the right was accepted or rejected by the taxpayer. If a patron desires to support an organization but does not intend to use the event tickets or exercise the other privileges being extended, he or she can make an outright gift, in which case he or she would not accept the tickets and would receive a full deduction for any payment made.

Direct and Indirect Expenses

The IRS has issued a number of Revenue Rulings describing the procedures used in measuring the return benefit to the donor. This measurement can only be accomplished by understanding the difference between a direct expense (benefiting the donor) and an indirect expense (one that essentially benefits the organization). Typically, direct benefits are measured by the fair market value of meals, entertainment and direct costs associated with the venue. This might include an honorarium paid to a speaker.

Staff time associated with producing the event would normally be a cost that might be treated as indirect, along with event planners, security, and the cost of printing and sending out invitations. These indirect expenses go on the statement of functional expenses and are included as fundraising costs.

In conclusion, the IRS would expect to see somewhere between a slight profit and no profit from the event. This assumes that a proper amount has been allocated to direct costs, leaving the charitable contribution portion properly recorded. It is also important to realize that this reporting is open for public inspection. Large losses from fundraising events give an appearance of misuse of the organization’s assets.

Robert Lyons, CPA, MST, Tax director, exempt organizations, at Marks Paneth LLP.

Published January 5, 2016.