More and more nonprofits are turning to special events as a major source for generating funds. As if event planning isn’t complicated enough, organizations also must take care to properly present the associated revenues and costs in their financial reporting.
When you sponsor an auction, golf outing or “fun run,” the main goal is usually to raise funds. So it’s easy to understand why some nonprofits mistakenly treat all of the revenues and costs as they would for other fundraising-related activities. But — and here’s the important part — certain amounts related to special events must be reported on financial statements in categories other than fundraising. The amount charged to attend an event usually exceeds the cost of donor benefits, with the excess considered a contribution. Donor benefits are considered “exchange transactions” where a donor receives something (for example, a dinner or T-shirt) for the donation. These may be reported in a separate supporting category, such as cost of sales, or as a program-related expense, although there are several allowable options.
Reporting gross revenues and cost of direct benefits
Nonprofits have three options for reporting most special events on their Statement of Activities:
- Present the cost of direct benefits to donors as a line item deducted from the special event gross revenues in the revenue section,
- Include the cost of direct benefits to donors in other program or supporting service expense and present the gross revenues in the revenue section, or
- Present the exchange portion as special event revenue (for the fair value of the benefit the donor received) and the remainder of the revenue as contribution revenue. The cost of the direct benefit to the donor is deducted from the exchange portion.
These options apply to special events that are ongoing and major activities for the organization. If the event is a one-time or incidental activity, amounts can be reported as gross (meaning revenues and expenses are reported separately, as in the options above) or net (expenses are netted against revenue and presented as a single amount) on the Statement of Activities.
Proper financial reporting will require careful tracking of a special event’s transactions. For revenues, you’ll need to track the number of tickets sold, the price paid for tickets and the fair value as well as cost of the donor benefit. For example, if 100 attendees paid $200 for a dinner with a fair value of $50, the contribution revenue is $15,000 ([$200 – $50] × 100 tickets). The exchange portion is $5,000 ($50 × 100 tickets). You’ll also need to track the cost of the dinner. Say the dinner cost the organization $35 per person. The cost of direct benefits to donors is $3,500 ($35 ×100). Note that the total cost of direct benefits to donors will typically include more than just the cost of the dinner — it would include costs for facility rental, decorations and the like. Other costs could be reported as fundraising expenses. Expenses incurred for marketing the event, public relations, allocated employee time and similar costs qualify as fundraising.
And tax reporting, too
Special events come with special tax reporting and compliance requirements, particularly if gaming is part of your event. Contact us to discuss your tax reporting requirements.