Holding an Auction? Be sure to Comply

So, you’re having an auction. Rev up the team to solicit those baskets of goodies, spa visits and game tickets, but don’t forget about complying with tax laws. There are several steps your nonprofit must take to fulfill your tax obligations and help your auction buyers fulfill theirs.

Putting it in writing

If you hold an auction to sell merchandise or services that have been donated to your charity, you should provide written acknowledgments to the donors of auctioned items valued at $250 or more. You won’t incur a penalty for failing to acknowledge the donation, but the donor can’t claim a deduction without such proof. Include in your acknowledgment:

  • The name of your organization and a description — but not the value — of the donated item,
  • A statement and good faith estimate of the value of any goods or services that your organization provided in return for the contribution, or
  • A statement that no goods or services were provided by your organization in return for the contribution.

It’s the donor’s responsibility to substantiate the value of a donated auction item.

Certain rules for certain gifts

Donors of services (for example, legal, beauty or personal chef services) may be surprised to learn that their donations aren’t tax-deductible as contributions — make sure you alert them to this in advance. The same goes for the donation of the use of a vacation home or use of other goods, equipment and facilities.

Donors of property, such as artwork or fine jewelry, can be told that tax law generally limits their deduction to their tax basis in the property (typically what they paid for it). They can’t deduct the current fair market value (FMV) of the donated property if it’s higher.

Here’s another type of situation: If you receive an item for auction valued at more than $500 — and within three years sell the property — you must file Form 8282, “Donee Information Return.” You also must provide a copy of the form to the item’s donor. Form 8282 must be filed within 125 days of the sale. If you fail to file the form, penalties could apply.

And motor vehicle donations call for yet another treatment. You must provide Form 1098-C to the donor reporting the actual amount received when you sell the vehicle, within 30 days of the sale. The donor’s charitable deduction is limited to this amount.

Disclosing the FMV of the items

A contribution made by a donor who also receives substantial goods and services in exchange (such as the item won in the auction) is known as a quid pro quo contribution. Under the IRS rules, you must provide a written disclosure statement to a donor who makes a payment of more than $75 that’s partly a contribution and partly for goods and services received. These disclosures are often required in the context of charitable auctions when the bids exceed $75.

So, it’s a wise practice to provide bidders with a good faith estimate of the FMV of each available item in the auction catalog or provide the FMV in the descriptions posted at the time of bidding. Include language notifying bidders that only the amount paid that’s more than the FMV is deductible as a charitable donation. This will satisfy the written disclosure requirements.

The failure to provide the written disclosures can result in penalties of $10 per contribution, not to exceed $5,000 per auction. You can avoid the penalty if you can show your failure was due to “reasonable cause.”

Don’t forget sales tax

Remember that your organization’s exemption from paying sales tax when purchasing items isn’t an exemption from collecting sales tax when selling items. Charitable auctions are basically sales, and most states require nonprofits to collect sales tax on the items sold.

If your organization doesn’t normally engage in merchandise sales, you may need to register with your state to collect sales tax. Some states allow exemptions for “occasional sales,” though. Research the state and local sales tax implications before you hold your event to ensure compliance. Your CPA can help.

Remember to comply

An auction can be an effective way to raise funds for your organization while sponsoring an engaging event. But don’t lose sight of tax compliance

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