The Dos and Don’ts for Charity Auctions

Whether or not this is the first time you are doing an auction or the auction is a regular event for your 501(c)(3) organization, this article will provide a variety of pointers which apply to live or silent as well as virtual events.   Some of the advice will keep your organization in compliance with tax or legal requirements and some will help to make your event a successful one for the organization--efficiently run without hiccups during the event and afterwards for purchasers, donors or the organization.  We have divided the subject into six areas that we believe are all important.

Managing and Optimizing Your Auction:

Do’s

• Consult with a nonprofit tax advisor at an early point in the planning process
• Consider using a third-party auction services company to manage and market the event
• Plan the logistics carefully—make sure the bidding, buying and pick-up of purchases is well thought out so there is no confusion or unnecessary bottlenecks for participants
• Get the organization’s message out there with a short presentation or award to an outstanding volunteer
• Make it fun!  Look for an entertaining auctioneer—perhaps a local celebrity
• If you have a bar, keep it open—alcohol tends to loosen wallets and increase friendly competition among bidders
• For silent auctions, carefully control the closing so there are no disputes on final bids
• Print and circulate an auction program listing items being auctioned as well as the procedures and rules for the auction
• Have a gift acceptance policy and consider circulating a list of wanted or acceptable gifts

Don’ts

• Do not assume that compliance with tax and other statutes was correctly done in prior years—things often get missed and should be corrected
• Don’t assume that prior year event procedures cannot be improved
• Other than general tax advice, do not get caught in the trap of giving tax advice to bidders or donors—that is not your business—advise them to consult with their own tax advisors
• Do not accept donations that put the organization at risk (e.g., rock-climbing or skydiving) or which go against the organization’s mission or culture

Acknowledgement of Donated Items:

Do’s

• Send acknowledgement letters for all donations of merchandise
• The acknowledgement letter can say a lot about the organization and its programs but must contain certain key information—see IRS Publication 1771 for plain English explanations of what each type of acknowledgement must say

Don’ts

• Do not put a Fair Market Value (FMV) on the acknowledgement for a donation of merchandise—the donor is responsible for establishing that and reporting on their tax return
• Don’t acknowledge gifts of services or use of facilities (e.g., preparation of a meal or use of a cabin) as charitable donations because they are not tax deductible!  You should be upfront with such donors and tell them at time of donation so they don’t feel misled later—you don’t want bad donor relations

“Quid Pro Quo Rules”:

Do’s

• Auction purchases are only deductible to the extent that they are in excess of the FMV of the item purchased.  Purchases for less than FMV will not provide a charitable deduction at all for the purchaser
• The auction program should list each item up for auction and include its FMV and prominently print a statement that the deduction is only allowed for purchases in excess of FMV
• Again, consult IRS Publication 1771 for the quid pro quo rules
• Although acknowledgement letters are only required for purchases of $250 or more (as long as the auction program has FMV and rules clearly stated), consider sending acknowledgment letters to all purchasers, even those who are getting no charitable deduction, so that they feel well appreciated for supporting the organization

Don’ts

• Again, don’t give tax advice other than the general information described above

Fair Market Value (FMV):

Do’s

• FMV can be estimated, so it is not an absolute.  Donors of auction items are the best source of FMV.  For merchandise, it is generally the retail price of an item; for rentals, comparable rental rates for similar facilities are a good source for an estimate.
• Ask the donor to provide an estimate of FMV and an explanation of how it was calculated
• When donor does not or cannot provide FMV, the organization will have to do the best it can to value an item
• Ask questions when a donor’s FMV looks unreasonably high or low or perhaps based upon wholesale and not retail price

Form 990 Implications and Compliance:

Do’s

• Complete Schedule G, Part II if total receipts are $15,000 or more
• Properly spread out the contribution revenue from the purchase proceeds on the Part VIII revenue summary and report event expenses here as well
• Generally, report the net income or loss from the auction in the excluded (non-UBIT and non-program) income column on Part VIII
• Include the FMV of donated auction merchandise as non-cash contributions

Don’ts

• Don’t double count the expenses of the auction on Part IX Statement of Functional Expenses on Form 990—they are already included on Part VIII Revenue section

Sales Tax, Permits, Licenses:

Do’s

• Determine if auction sales are subject to state and/or local sales tax.  This varies significantly from jurisdiction to jurisdiction and there may be exclusions for charity auctions or occasional sales.  Consult an expert.  This may be a yearly project if you move the location annually as part of a meeting
• If applicable, register for sales tax collection in the jurisdiction
• Collect sales tax on sales as appropriate and remit as required by the jurisdiction
• Raffles are generally considered gaming by the IRS. 
o  If contemplating a raffle in conjunction with the auction, the income will likely be considered taxable unrelated business income
o Complete Schedule G, Part III if raffle revenue is $15,000 or more
o Consider whether you need a gaming license in the state (this will vary for a charity event)

Don’ts

• Do not forget to inform purchasers that sales tax will be collected
• Don’t conduct a raffle without fully considering and understanding the legal and tax ramifications

Conclusion:

A properly planned and executed charity auction can be a very profitable activity for 501(c)(3) charitable organization.  It can be a great, fun time to bring supporters together and further the message about the good works of the charity.  However, there are a lot of moving parts that have to be considered and coordinated before, during and after the event.  Getting advice from exempt organization tax advisors is highly recommended.