Special events such as galas, dinners and golf tournaments are a popular way for charitable organizations to raise awareness and attract donors to important causes. These events generate a great deal of excitement, but they can also result in headaches if compliance issues are overlooked.
The following is a summary of some of the more challenging compliance issues associated with special events.
Quid Pro Quo Contributions
The term quid pro quo (which means “something for something” in Latin) means an exchange of goods or services when one transfer is contingent upon another. When organizations collect money for events (for example by selling tickets to a charity ball or accepting registrations for a golf tournament), typically only the portion of the amount received may be deductible as a charitable contribution by the donor. The deductible amount is the amount that exceeds the fair value of goods and services provided to the donor in exchange for the contribution.
Charities are required to send donors an acknowledgement letter with a disclosure statement that provides a good faith estimate of the market value of the goods and services they received when the donor's payment is more than $75.
The charity’s cost is typically not the determining factor for the estimated market value unless they paid the market rate. Because businesses such as caterers and restaurants offer nonprofit discounts, the charity’s cost is not the market value. To make a good faith estimate, use the dinner menu price of a typical entrée at the restaurant, not the charity’s cost per guest.
The penalty for failure to provide the written disclosure of the good faith estimate is $10 per contribution, not to exceed $5,000 per fundraising event, so be sure not to overlook this compliance requirement.
When non-cash gifts such as food and catering, prizes, and auction items are received from donors, they will typically need a letter from your organization acknowledging the receipt of the donated item in order for them to claim a tax deduction. A donor cannot deduct a single charitable contribution valued at $250 without having the written acknowledgment from the charity. It is important to keep detailed records of donated items along with documentation to support the donor’s gift.
A popular way to raise money is to ask local businesses to become event sponsors. Typically, the perks of sponsorship vary depending on the sponsorship level (for example, platinum, silver, gold and bronze) and could include complimentary tickets, spots in golf tournaments, receptions for major donors and distribution or display of the sponsor’s product at the event. The value of the goods and services provided in exchange for the sponsorship payment is treated as a separate quid pro quo transaction, and the remaining sponsorship payment is generally tax-deductible as long it is a qualified sponsorship payment.
There is an important distinction between a “qualified sponsorship payment” under the IRS regulations and advertising. Many organizations include the names and logos of sponsors in event programs, brochures or other fundraising materials, which is considered a form of acknowledgment and is still a qualified sponsorship. However, if the charity advertises the sponsor’s products or services, the advertising income could be subject to unrelated business income tax (UBIT). Advertising includes messages containing qualitative or comparative language, price information, or other indications of savings. Payments for advertising services are not deductible as a charitable contribution.
Unrelated Business Income Taxes (UBIT)
Some organizations are liable for federal income taxes on amounts raised from special events and gaming. Certain activities qualify for an exception or exclusion from UBIT under the law and based on specific facts and circumstances. For example, if the special event is substantially carried out by volunteers who do not receive compensation, the organization could avoid tax liability under the “volunteer labor” exception.
In addition, an organization conducting any type of gaming should understand how the activity can impact its federal tax-exempt status, as well as its tax and information reporting responsibilities. Also note that there are regulations at the state and local level that restrict certain gaming or gambling activities, with severe penalties for non-compliance. The term gaming includes bingo, raffles, casino type games, pickle jars and other games of chance. Gaming can result in federal tax liability under the UBIT rules unless the activity qualifies for an exclusion or exception. For example, there is an exception for bingo games.
Organizations that fail to pay taxes face significant penalties and accrued interest on unpaid taxes. It’s important to know the UBIT rules and document the basis for any exception, in case of an IRS audit. The AICPA Not-for-Profit Section’s tax compliance resource library has a primer on UBIT that is available for download.
Form 990 Reporting
If your organization files an annual IRS Form 990 or 990-EZ, you will need to report income from fundraising events and associated expenses. Generally, these income and expense amounts are reported on Form 990, Part VIII, Line 8. If fundraising event contributions exceed $15,000 for the year, you will need to include Schedule G Supplemental Information Regarding Fundraising or Gaming Activities along with the Form 990 filing. Schedule G requires further detail and itemization of special event income and expenses. If you have multiple events, make sure you setup your accounting systems to track each event separately to facilitate Form 990 reporting.
Compliance with State and Local Charitable Solicitation Laws
Most charitable organizations engaging in fundraising and solicitation of donations are subject to state solicitation laws. Also, cities and counties in some states require registration as a condition to charitable solicitation within their jurisdictions. Typically, registration entails submitting a registration fee and a good deal of paperwork, including documents showing a statement of charitable purposes, how the organization intends to solicit in the state, and how the organization intends to use the solicited funds, as well as organizational documents such as articles of incorporation, bylaws, and an IRS determination letter.
Significant penalties can be levied against organizations that fail to register for a solicitation license. For example, Florida imposed a $10,000 fine on a Tampa charitable organization that failed to register to solicit, New Jersey imposed a fine of $17,500 on an in-state entity for failure to register, and Georgia imposed a $25,000 fine for failure to register (although that fine was mistakenly imposed on an organization that was exempt in Georgia). Make sure you understand the state and local laws in your area to avoid these costly penalties.
If you work in a charitable organization, chances are you have a special event, or even multiple special events to attract supporters and raise money. Finance and accounting professionals can provide valuable input into event planning to keep the organization compliant. Work with the fundraising team early in the event planning process to avoid unexpected surprises at year-end.