Holding a fundraising auction? Make sure your nonprofit is tax-compliant

Auctions can be lucrative fundraising events for not-for-profits. But these events come with some tax compliance responsibilities.

Acknowledging item donations

If you auction goods or services which have been donated to your charity, you need to give written acknowledgments to the donors of the 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 that written proof. That could hurt your ability to obtain donations in the future.

Written statements should include your organization’s name and a description of the donated item. (Do not include the value though. It’s the donor’s responsibility to substantiate the donated auction item’s value.) Also indicate the value of any goods or services provided to the donor in return.

Other rules

Donors of services or the use of property are often surprised to learn that their donations aren’t tax-deductible. Alert these donors before they make their pledges. Inform donors of property, such as artwork, that tax law generally limits their deduction to their tax basis in the property (typically what they paid for it).

If you receive an auction item valued at greater than $500, then sell item within three years, you must file Form 8282, “Donee Information Return,” and provide a copy to the original donor. Form 8282 must be filed within 125 days of the sale.

Substantiation for winning bidders

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. To take a charitable deduction, winning bidders must be able to show that they knew the value of the item was less than the amount paid. So provide bidders with a good faith estimate of the fair market value of each available item before the auction and state that only the amount paid in excess is deductible as a charitable donation.

In addition, your nonprofit is required to provide a written disclosure statement to any donor who makes a payment of more than $75 that’s partly a contribution and partly for goods and services received. The failure to provide the disclosures can result in penalties of $10 per contribution, not to exceed $5,000 per auction.