Whether your not-for-profit is holding an in-person or online auction to raise funds, you need to be careful to adhere to tax requirements. For example, you should provide written acknowledgments (including good faith estimates of any goods or services provided in return for contributions) to donors of items valued at $250 or more. Here’s an overview of auction-related tax issues — including those your donors should be made aware of.
Recognize general rules
It’s generally the donor’s responsibility to substantiate the value of a donated auction item. But you should consider letting donors of appreciated property, such as artwork or fine jewelry, know that tax law usually limits their deductions 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.
Additionally, if you receive an item for auction with a claimed donation value of more than $5,000 and sell it within three years, 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 date of sale. Failure to file the form could result in penalties.
For motor vehicle donations, you must provide Form 1098-C to the donor within 30 days of the vehicle’s sale to report the actual amount received. The donor’s charitable deduction is limited to that amount. Donors of services (for example, legal or beauty) need to know that such donations aren’t tax-deductible. Alert them to this in advance. The same goes for donations of the use of a vacation home or use of other goods, equipment or facilities.
Deal with quid pro quo donations
Contributions made by donors who receive substantial goods and services in exchange are known as quid pro quo contributions. Under IRS rules, your organization must provide a written disclosure statement of the FMV of the goods or services received by any donor who makes a payment of more than $75 that’s partly a contribution and partly for those items. Such disclosures are often required for charitable auction bids exceeding $75.
So it’s smart to provide bidders with a good faith estimate of the FMV of each available item in the auction catalog or in the descriptions posted at the time of bidding. Include language notifying bidders that only the amount paid in excess of the FMV may be deductible as a charitable donation. (This will satisfy the written disclosure requirements.) Failure to provide the written disclosures can result in penalties of $10 per contribution, not to exceed $5,000 per auction.
Don’t forget sales tax
Finally, remember that your organization’s exemption from paying sales tax when purchasing items isn’t an exemption from collecting sales tax when selling items. Be sure to research the state and local tax implications of your auction before you hold it — or contact us for assistance.