Pulling off a successful auction to raise money for your nonprofit requires meticulous planning. You have to recruit donors to contribute items that go to the highest bidders. Another responsibility involves assigning volunteers to help with the logistics required to run a successful auction. One responsibility that does not appear on many nonprofit radars concerns the tax implications of running an auction.
From holding a live silent auction to conducting an auction online to attract donors, you should understand the tax requirements imposed by the IRS on nonprofit organizations.
Overview of IRS Rules
Although donors assume the responsibility of valuing donated items, your nonprofit should inform each donor that any appreciated property should be valued based on how much the donor paid for the item. If you receive a donated item from an auction valued at more than $5,000, you must file form 8282 if your nonprofit sells the item within three years of receiving it. You also must send a copy of Form 8282 to the donor. If a donor gives your nonprofit an automobile, you must send the donor Form 1098-C by the end of 30 days after selling the automobile. The sales price, not any appreciated value, is what the donor can deduct from an income tax statement.
Quid Pro Quo Rules
Quid pro quo donations represent a type of donation in which the fair market value of a donated item is worth less than the value of the donation. For example, an item that goes for $500 at a nonprofit auction that is valued at $200 generates $300 for a charitable contribution to be deducted from an income statement. Your nonprofit organization must provide the donor with a disclosure statement that describes the difference between what the item got at an auction and the fair market value of the auctioned item. Any quid pro quo donations worth more than $75 require your nonprofit to present the donor with a written disclosure statement. A disclosure statement should present the amount of the charitable contribution that qualifies for an income tax deduction, as well as a good faith estimate for the fair market value of the donated item.
Handling Sales Taxes
Not every auction transaction concerns federal income tax issues. Your nonprofit organization also must address the sales tax produced by selling an auction item. The state where your nonprofit operates administers the sales tax policy. However, your nonprofit should be aware of any municipal sales taxes in addition to the sales tax required by the state. The key is to understand your nonprofit organization might create a sales tax liability for every item sold after an auction.
Form 990 represents an IRS document that all tax-exempt nonprofit organizations must submit. It is a form that documents all of the auction transactions consummated over one year. If your nonprofit generates less than $50,000 per year in revenue, you might not have to submit this form. Form 990 provides the IRS with much more activity detail than Form 990-EZ.