Calculating the Tax-Deductibility of an Auction Item
We’re planning a major fund-raising event for our nonprofit organization. When someone bids on an auction item, sponsors a table, or buys a ticket, how do you calculate the tax-deductible amount?
Which Organizations Qualify?
First, make sure your organization is qualified to receive donations that are tax-deductible from the donor’s perspective, as not all are. Many industry trade organizations, for example, do not qualify because the percentage of their resources dedicated to government lobbying exceeds certain thresholds. The Toy Industry Association, for example, is a 501(c)(6), and contributions given to it do not qualify for tax deductions. Organizations like this may set up affiliated charities, such as the Toy Industry Foundation, as a 501(c) (3) to accept tax-deductible donations.
Calculating The Tax-Deductible Amount
Tax laws vary from country to country. In the United States, according to the Internal Revenue Service, when a person or organization buys something at a fund-raiser, the tax-deductible portion of the donation is calculated as follows:
Donation - Fair Market Value = Tax Deductible Amount.
For example, let's say someone buys a ticket to your fund-raiser for $500. The fair market value of what the donor received is determined by what they are getting at your event. If it's a reception and dinner, and you're paying the venue $200 per person for the food and beverage, that is likely the fair market value for what the donor receives. So the tax-deductible portion of the donation is $300 ($500 minus $200). If, instead of buying a ticket, someone sends in a $500 donation and gets nothing in return, the entire $500 is tax-deductible.
Donors claiming the charitable donation on their tax returns will need some form of backup from you. The host organization should furnish all donors with a document (whether by email or a printed letter) that clearly indicates how much was donated and the fair market value of what the donor received. Like other deduction categories, charitable donations tend to max out at higher income levels, so just because someone has given a donation with a tax deductible amount of $500 doesn't mean they will necessarily be able to apply that on their tax return. For that, and other reasons, it’s usually best for the verbiage on your notification document to say something like, "Your gift is tax deductible to the extent permitted by law." And, it's always a good idea to review your situation with your organization's accountant.