5 Things to Know About Compliance for Nonprofit Auctions
Charity auctions are frequently major sources of fundraising revenue for nonprofit organizations. Plus, they’re highly engaging opportunities for your event participants.
Due to this great potential for revenue-generation and opportunity for supporter engagement, many nonprofits schedule their event calendars around major auction events. However, collecting donations and handling the revenue at your auction is a slightly more complicated process when it comes to financial compliance.
In order to protect your nonprofit and get the most from your fundraising potential, be sure you know the key aspects of financial compliance and how it differs for your auction event. In this guide, we’ll go over the following aspects of compliance:
- Why you should write an auction donation acceptance policy.
- How sales tax works for auction items.
- What documents to provide to auction donors.
- What the IRS reporting process looks like for auction revenue.
- Tips to maximize your financial revenue.
The best thing your nonprofit can do when it comes to ensuring financial compliance is to talk to an expert. Consider hiring a nonprofit accountant or outsourcing your accounting department to experts such as those at Jitasa. In doing so, you’ll have access to a team of professionals to answer all questions so that you can rest assured knowing that all compliance issues are in order.
Without further ado, let’s dive deeper into the complexities of financial compliance for nonprofit auctions.
1. Auction Donation Acceptance Policy
Many nonprofit organizations accept in-kind donations as a part of their auction procurement process. This allows the organization to maximize revenue from that particular auction item, which is a great deal for the nonprofit!
However, sometimes your nonprofit may receive less desirable offers for in-kind donations for the auction items. For example, imagine if your supporters tried to contribute live animals, items of questionable legality, or other undesirable items. Telling these good-hearted supporters that you can’t accept their gift could discourage further engagement with your nonprofit.
That’s why having a donation acceptance policy is a great way to lessen the blow by providing solid backing as to why you can’t accept the gifts. It helps your organization in a couple of different ways:
- It creates standards that your supporters must adhere to when contributing. Your auction donation acceptance policy can act as a guideline to ensure everyone is on the same page about contributions from the beginning.
- It protects your organization if someone tries to donate something you don’t want. Instead of ruining a relationship with a supporter and needing to explain why the donation is invalid, you have a legal document drafted to protect the nonprofit.
While it may seem unlikely that supporters would contribute undesirable auction items to your nonprofit, just remember that they probably wouldn’t do so knowingly or with any ill intention. They may be donating items that are within your auction’s theme or otherwise contribute an item that they believe to be appropriate. The last thing you want is to seem ungrateful for their desire to contribute.
2. Sales Tax for Auction Items
While most donations contributed to your organization are given freely with no strings attached, auctions work slightly differently. Instead of freely giving to your nonprofit, your supporters are buying items, which impact the financial processes. This transaction means that your nonprofit should pay attention to the sales tax requirements for your state.
Conduct some research to determine whether or not your organization will be required to pay sales taxes on your event tickets, auction items, or other aspects of your auction event.
Some auction software solutions will collect and remit sales tax for your organization. However, many of these companies also charge for the use of their software. A simple cost-benefit analysis can help your organization determine if your projected auction outcomes warrant the investment in one of these software solutions.
Talking to an accountant can also be beneficial for your organization if you’re having trouble determining what the estimated sales tax will be for your event and if it’s worth investing in a software solution that will help with this expense. This article explains further what you can expect when working with a nonprofit accountant for situations such as these.
3. Documents to Provide Auction Donors
There are several documents that your organization should provide to your supporters regarding your auction. These documents provide the information they need for tax deductions and for their own records.
You will need to provide documentation to supporters for the donated auction items as well as the donations made during the auction itself.
Documents that you should be prepared to provide to supporters include:
- Written acknowledgments. Written acknowledgments are required for every donation over the value of $250. However, it’s a good habit to send an acknowledgment for every donation your nonprofit receives. An official acknowledgment letter for non-cash items must include the name of your nonprofit, a description of the donated property, and a statement about the transaction made in return for the contribution (even if no transaction occurred).
- Tax deductibility handout. Tax deductibility handouts are not always required for nonprofits. However, they can be incredibly helpful in explaining the tax deductions associated with the various auction items bought at the event or donations made. We recommend that your organization put this document together with the help of a tax professional and that your supporters talk to financial advisors with any questions about deductions.
Specific documentation such as these allows your supporters to more easily file their taxes in the next year just as it helps your nonprofit remain compliant with donation regulations.
4. Reporting to the IRS About the Auction
Before you host your auction event, you should make sure your nonprofit has the reporting tools you need to accurately collect and communicate data about the financial outcomes of the organization.
Collecting and reporting effectively is key to ensuring your organization has all of the data you need to report correct information to the IRS. Plus, automated and comprehensive reporting tools will help your nonprofit bookkeeper update your organization’s records with the correct information.
The data you’ll need to keep records on in order to report to the IRS include:
- The amount you’ve received in in-kind donations. Nonprofits who receive $25,000 or more in in-kind donations need to file a Form 990M. Make sure your organization has an effective system in which you can track all of your in-kind giving. Often, this can be done easily through your special event accounts or accounting software.
- Any contributions for which your donors need to file a Form 8283. Donors must file a Form 8283 if they contribute more than $500 worth of goods to your organization. While your nonprofit doesn’t fill out this form themselves, you should request a copy of the form for your records.
- The data on which you’ve received and sold auction items. When the procurement and sale both occur in the same fiscal year, you can simply report on the net contribution income. However, if you procure the item during one fiscal year and sell it the next, the financial records become more complicated.
- All revenue and expenses for the event. Specify and categorize the various income streams you had for the event such as ticket sales, additional donations, raffles, in-kind donations, and contributions made through auction item sales. Do the same with the event expenses such as your fundraising software investment, venue space (whether virtual or in-person), food served, items purchased, and other miscellaneous expenses.
When you have comprehensive internal reports, you can feel more confident about filing your Form 990 at the end of the fiscal year. Or, you can make sure you provide your nonprofit accountant with the tools and financial information they need to fill out these required forms.
5. Tips to Maximize Auction Fundraising Revenue
As we expressed at the beginning of this article, auctions are frequently one of the most lucrative events hosted by nonprofit organizations throughout the year. Financial compliance can be a lot of work, but ensuring you maximize revenue from the event makes it all worth it.
There are several things your nonprofit can do in order to make the most of your auction event. Our top tips to help you raise more at your event include:
- Investing in the right auction software. Choose a software solution with comprehensive features that will help your nonprofit raise more by simplifying the event planning and execution processes without overspending upfront.
- Request additional donations at registration. By asking your supporters to give more up-front at the time of their registration, you can augment your fundraising revenue before the event even starts.
- Take advantage of corporate social responsibility programs. Double the Donation’s guide explains how these programs can be used to match the donations that supporters make to eligible nonprofits, how you can obtain event sponsorships, and more.
- Include gamification features. Visual gamification tools like fundraising thermometers motivate donors to give more to your nonprofit because they see the direct impact that their contributions have to help you reach your goals. Auctions themselves are built for gamification, but things like outbid notifications for mobile donations can take it to the next level.
- Intentionally organize your auction items. Setting your big-ticket items next to smaller items at your auction table can make these big-ticket items seem less valuable. Meanwhile, setting a small item next to big-ticket items makes it seem more valuable. Take these aspects into consideration when you organize your event.
Little tips and adjustments can help your nonprofit raise more at your event. Be sure to think through all of your event planning decisions so that your auction can reach its full potential.
Financial compliance may seem a bit complicated at first. However, it’s important to make sure your nonprofit is protected during your auction event. We recommend reaching out to an accounting expert can help you make sure your auction event is compliant and set up correctly during the event planning process. This will help you enter the auction arena confidently and ready to raise more.
Special thanks to Jon Osterburg for his expert advice on compliance for nonprofit auctions. Jon has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa.