Charity Auctions: Reporting and Tax Rules

By R. Michael Sorrells, CPA

While neither charity auctions nor the various rules governing them are new, we receive numerous questions about them and observe many examples of inadequate auction procedures by both large and small organizations.

Charity auctions (silent or live) typically sell merchandise or services that are donated to the organization. Thus, the first requirement for the organization is to acknowledge the donation of the item to be auctioned. Often, this step is missed, as the organization is more concerned about reporting to the purchaser and not the donor. If the donated item may have a $250 or higher fair market value (FMV), then the organization should be sending out acknowledgement letters with certain required language, including that no goods or services were received in exchange for the donation. This acknowledgement is required if the donor is going to take a tax deduction for the donation. For donated items, the organization should not put the value of the item on the acknowledgement letter, even though the donor may have provided it. The donor is responsible for valuing the donated item on his/her tax return and the rules can vary significantly here. For example, if the donation is from the donor’s inventory, the donor’s deduction may be different than if the donation is from the donor’s art collection.

Also, if the appraised value of the gift is greater than $5,000, the donor may be giving the charity a Form 8283 to sign. If this is the case, when the item is sold at the auction, the charity will be required to file Form 8282 with the IRS that indicates the donated item was sold and the price at which it was sold.

Similar acknowledgement rules apply to the purchasers at the auction when they spend $250 or more on an item. The organization should send them an acknowledgement for the purchase, but in this case the letter should tell them how much of the purchase price is for the goods and services received (not deductible) and how much is in excess of that
amount (deductible).

Often, donors to a charity auction donate use of a vacation home or personal services (for example, cooking a dinner) to be auctioned off. However, donations for use of facilities or services do not qualify as charitable deductions. In this case, it may be prudent for the organization to tell donors in advance that it is their understanding that these types of gifts are not tax-deductible, but that they should consult their tax advisors.

Another rule requires the organization to inform the donor of tax deductibility for event tickets or purchases of $75 or more (IRC Section 6115(a)). Failure to do this can result in penalties to the organization and disclosure of compliance is one of the questions on the Form 990. Under these “quid pro quo” rules for event tickets or purchases of $75 or more,
the organization is responsible for informing the purchaser as to how much of the purchase price is a donation and how much is for goods and services. In other words, any excess over the FMV of an item is a donation. If the purchase price does not exceed the FMV, then there is no donation by the purchaser (which is often the case). The easiest way to inform auction purchasers of FMV is to provide the information on the program. The value of each item should be listed and there should be prominent language saying that only the amount paid in excess of value is allowable as a charitable deduction. It is important that the retail value of the item be used on this listing—not simply its cost, as it may have
been purchased at a discount or produced by the donor. Often, the donor of the item can provide this information; if not, the organization will have to do some research. The valuation can be a good faith estimate.

Another area often ignored with charitable auctions is sales or local tax. Most states (and some localities) tax sales of merchandise by charitable organizations; having an exemption from paying sales tax is not an exemption from collecting it. Many organizations already are engaged in the sale of merchandise and are already registered with the state where the auction is occurring. However, when an organization does not ordinarily engage in merchandise sales or is conducting an auction in another state, it may be required to register and collect sales tax even for a one-time event. Some states have exclusions from registration and collection of tax for “occasional” sales and for charitable fundraising. So it is important to research sales tax issues well before the planned auction date.

Lastly, for the Form 990, charitable auctions will be reported as a fundraising activity on the revenue section (Part VIII) and, if above certain thresholds, on Schedule G. The donation portion of the receipts is reported on Line 1c for Part VIII as donations, while the value of purchased items (the FMV) goes on line 8a of Part VIII as gross income. Schedule G requires a listing of all fundraising events with a little more detail. The net income of the fundraising event will generally be shown in the “excluded” column of Part VIII, as it usually fits an exclusion from unrelated business
income either because of selling donated merchandise, use of primarily donated merchandise in the activity or because the activity is not regularly carried on (once a year or less in frequency). While charity auctions may be lucrative fundraisers, it is important to know and comply with the rules in order to keep the IRS, donors and state taxing authorities happy.

For more information contact a Templeton Advisor.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2014). Copyright © 2014 BDO USA, LLP. All rights reserved.

#Nonprofits #Socialmedia and #Taxes: Is your organization protected?

By Sandra Feinsmith, CPA

Social media can offer cost-effective platforms through which nonprofit organizations can better communicate with stakeholders and raise awareness of their causes and fundraising efforts.

Following major online giving success stories such as #GivingTuesday and The ALS Association’s Ice Bucket Challenge,
more nonprofits are actively participating on social media channels to get in front of potential donors: U.S. nonprofits saw 37 percent growth in followers on Facebook in 2013, and 46 percent annual growth in Twitter followers, according to the 2014 eNonprofits Benchmark Study by M+R.

While nonprofit organizations are increasing their use of social media, the Internal Revenue Service (IRS) has so far provided very little guidance to organizations regarding both the use of social media and its potential tax implications. The official IRS stance is to treat online communications—including email, blogs, Facebook, Twitter and the like—the
same as printed media, such as periodicals.

The IRS defines a periodical as “any regularly scheduled and printed material (e.g., a monthly newsletter) published on behalf of the organization.” When an organization’s printed periodical contains editorial information related to the organization’s exempt purpose, the IRS treats the sale of advertising in the publication as an unrelated business that exploits an exempt activity. As such, the organization is subject to the rules governing the calculation of Unrelated
Business Income Tax (UBIT) for advertising. Of course, these very same rules pertaining to UBIT around advertising income and expenses also apply to online publications and social media, given the current IRS stance.

The sole, distinguishing snippet of IRS guidance regarding online activities and social media is contained in Internal Revenue Code (IRC) Regulations section 1.513-4(f), which describes what constitutes a Qualified Sponsorship Payment versus advertising in online activities. To illustrate this, let’s consider a scenario in which a symphony orchestra maintains a website containing pertinent information about the organization and its performance schedule. A business
(“Music Shop”) makes a payment to the orchestra to fund a concert series and, in return, the organization adds the business to the list of sponsors it features on its website. It does not promote Music Shop or advertise its merchandise, but the orchestra’s website does provide a hyperlink to Music Shop’s website. The orchestra’s posting of Music Shop’s name and Internet address on its website constitutes acknowledgement of the sponsorship. The entire payment is a Qualified Sponsorship Payment, which is not considered income from an unrelated trade or business.

Now, consider how the following scenario differs:

A nonprofit organization tweets that one of its corporate sponsors is running a special on computers and receives a commission based on the number of tweeters who access the sponsor’s site. Thus, under current IRS rules and regulations, the tweet may impact the overall corporate sponsorship agreement, the commission would constitute unrelated business income, and the tweet would be considered advertising.

Given such limited and vague guidelines, it is no surprise, then, that exempt organizations may be unsure of their obligations while using social media. We fully anticipate that, in the near future, the IRS will release more thorough guidance for tax-exempt organizations surrounding their social media use. Though this guidance does not yet exist, nonprofits cannot overlook the potential tax liabilities associated with social and digital media use. IRS agents have been trained to look at and request screenshots of an organization’s website and other forms of online communications. Essentially, online platforms provide open access to organizations’ information, offering an audit trail for the IRS and states regarding:

  • Political and lobbying activities
  • Consistency of organizations’ online and social media activities with their exempt purpose
  • Potential sources of unrelated business income—such as advertising—versus Qualified Sponsorship Income
  • Charitable solicitation (which is also of interest to state charity regulators)

A lot of damage can be done in 140 characters. Organizations should take care to accurately report all online activity in order to make sure they are protected. To help organize and implement this process, organizations should develop and enforce social media policies for both the organization as a whole and its individual employees and volunteers. A sound
social media policy can help prevent mix-ups between advertising income and Qualified Sponsorship Income long before the issue ever becomes a problem.

When crafting a social media policy, organizations should think carefully about what they hope to achieve and balance
that with how these desired activities may venture into unrelated business. Organizations must also remain cognizant of the laws and regulations associated with social media, including issues related to copyright, fair use and data protection. Some specific considerations organizations should keep in mind as they develop and implement their social media policies include:

  • Who has the right and responsibility to post under the organization’s name, as well as what is expected of those participating in social media conversations under their own names while publicizing their affiliation with the organization
  • The organization’s goals for using social media (e.g., is it a fundraising tool, an awareness tool, a community engagement tool or some combination of all three?)
  • The types of content that are appropriate for sharing, with an eye toward clearly establishing whether sponsored content could be linked to a Qualified Sponsorship Payment or advertising. The policy should include explanations and examples of each.
  • Clear guidelines around what information can be shared and what is confidential
  • Protocols for handling breaches of the social media policy by employees and volunteers of the organization
  • A resolution plan for any potential social media crises, such as inappropriate postings or negative feedback from social media followers
  • Opportunities and processes for organizational employees or volunteers to share their feedback and questions about the policy

As with normal offline activities, organizations should consult their tax advisor and legal counsel to make sure that their online and social media activities are structured correctly and they are fully apprised of the potential tax ramifications of their social presence. This will go a long way in minimizing exposure to regulatory scrutiny, and it will help protect the organization’s reputation.

For more information contact a Templeton Advisor.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2014). Copyright © 2014 BDO USA, LLP. All rights reserved.

The ALS Ice Bucket Challenge Offers Key Lessons for Nonprofit Fundraising Models

By Laurie Arena De Armond, CPA

On July 15, golfer Chris Kennedy was challenged to dump a bucket of ice over his head, post a video to social media and nominate three friends to do the same within a 24-hour period or donate to a charity of their choice. One of Kennedy’s nominees opted to donate to the ALS Association in addition to posting her own ice bucket challenge video. Separately,
on July 31, Peter Frates, former captain of Boston College’s baseball team who lives with ALS, posted his ice bucket challenge video to Facebook. These initial videos went viral on social media, rapidly transforming what began organically as a charitable challenge between friends into an online giving movement through which the ALS Association has gained unprecedented levels of awareness and donations.

As of Sept. 8, reported that the organization had received $111.1 million in Ice Bucket Challenge donations from individuals and corporations from all across the globe. Donations have ranged from $1 to $200,000, and 10 percent of visits to the organization’s site have resulted in donations.

The success of the Ice Bucket Challenge reinforces social media platforms’ ability to accelerate and drive fundraising campaigns. Of course, this online giving mega-success is exceedingly rare, and organizations cannot guarantee their campaigns go viral—indeed, the Ice Bucket Challenge was not even a campaign of ALSA’s own design.

Nevertheless, the model and features of the Ice Bucket Challenge may be valuable to other nonprofits as they seek ways to revamp their own fundraising strategies to reach a younger generation of potential donors. Part of the campaign’s appeal is its format: It’s authentic, fun, gamified and highly shareable, and it conveys a succinct and meaningful message.

Further, the campaign visibly demonstrates that average people can make a difference, not just through monetary donations but by using their own voice to promote awareness to their networks. Donors who see a clear connection between their contributions and overall outcomes—in this case, record-setting fundraising levels—are more inclined to spread the word, creating a multiplier effect through social media. While this effect has the primary impact of boosting donations, it also can help organizations resolve one of their biggest fundraising challenges: having to directly ask
the same audience for donations year after year. Social media allows donors to more easily become advocates.

Despite the resounding success of this campaign, we encourage organizations to remain cognizant of social media’s lack of predictability. As the Ice Bucket Challenge has proven, online charitable campaigns can quickly spiral into far-reaching movements through social platforms. Organizations can, as a result, lose control over their campaign’s
scope and how it’s shared online.

Similarly, nonprofits must also keep their financial responsibilities top of mind. As my colleague Sandra Feinsmith discusses in her article on page 5, the IRS has so far provided limited guidance on the tax implications of nonprofits’ social media use. Organizations must be proactive in their efforts to identify potential challenges and maintain compliance.

As nonprofits look to adjust their fundraising strategies for a new generation of donors, online giving campaigns offer significant opportunities for growth. Savvy organizations will look to lessons learned from the one-ofa- kind Ice Bucket Challenge to develop online community support to create sustained, long term advocacy and financial support for their

For more information contact a Templeton Advisor.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2014). Copyright © 2014 BDO USA, LLP. All rights reserved.

Take the CPA Exam Challenge

One of the main challenges young individuals face when entering the field of accounting is the decision of when to take the CPA Exam, and how to balance the demands of life in the real world. The article below, discusses how our firm, Templeton & Co., a 40-person CPA firm based in South Florida, created a CPA Challenge to engage and encourage our young associates and build team spirit within the firm. To view the article please visit