There are articles and how-to guides developed specifically for nonprofits to assist in special fundraising. While I’ve found these publications give great ideas from an event-planning standpoint, they often lack direction from a tax-compliance perspective.

In terms of taxes, the methodology for reporting a fundraiser is unique depending on the type of event held and the amount of income received. To narrow the scope of this article, we will review two of the most common ones—galas and auctions.

The methodology for reporting a fundraiser is unique depending on the type of event held and the amount of income received.

Reporting Your Fundraiser

The Form 990 has been designed to capture information for all events on a “net basis.” This means gross income derived from each fundraising event is distinctly reported on the tax return and subsequently offset by any direct expenses incurred by the event. If the total gross special event revenue exceeds $15,000 during the reporting year, the filing organization is required to detail its two largest events as discrete profit and loss statements on a supplemental disclosure (Schedule G, Part II).

For accurate tax reporting, each fundraiser should have distinct accounting records that chronicle revenue and expenses related to each event rather than all events total. Overhead allocations aside, direct expenses associated with an event should only be presented as offsetting each specific event’s revenue on the Schedule G disclosure. Not only is this advantageous from a tax-disclosure perspective, but it could also be beneficial for profitability and decision-making within the organization. 

Gala Fundraisers

In 2016, the Metropolitan Museum of Art generated approximately $21 million in contributions from fundraisers, with more than half of that amount coming from its famed Met Gala. The synergy of bringing people together for a cause aligned to core beliefs—where the spirit of giving is palpable—can culminate in a significant bump in revenue on a single night.

For every Met Gala ticket sold, the organization receives two streams of revenue, a “quid pro quo” payment and a contribution. The quid pro quo payment is an offset of the fair market value the attendee receives with the purchase of the ticket. This includes the cost of dinner, as well as any entertainment. For example, if an attendee purchased a $100 ticket and the catered dinner has a fair market value of $40, the quid pro quo portion of the ticket sale is $40.

Amounts in excess of the quid pro quo portion of the ticket sales are considered a contribution ($60). Typically, gala tickets are sold with a markup, and attendees understand that the additional funds are for a good cause. The contribution portion is presented separately from the quid pro quo portion of the ticket sales on the Form 990 to ensure a level of transparency. 

Auction Fundraisers

Another event organizations use to fundraise is an auction, which can appeal to the competitive human urge, coupled with altruistic goals. Often, the items auctioned are donated by third parties to show support of the organization’s mission, thus reducing overhead costs associated with the event. The pathway to isolating contributions associated with an auction can be complex, and the details are important. Treatment differs regarding how the auctioned items were obtained (purchase versus donated), as well as the amount of the winning bid (above or below fair market value).

When a third party donates an item to be auctioned, a noncash donation is recorded by the organization, which is based on the item’s fair market value at the time of donation. The contribution is not reported as a contribution related to the auction on Schedule G. Instead, it is a general noncash contribution held as inventory, to be sold later.

When auction items are sold, the revenue is bifurcated between a quid pro quo element and a contribution. The amount of each depends on the winning bid. If it exceeds the fair market value of the item auctioned, the contribution is the amount exceeding the fair market value—the quid pro quo portion is the fair market value. If the winning bid is less than the fair market value, there is no contribution element, and the quid pro quo amount equals the cash received.

For example, if a third party donates a laptop with a fair market value of $1,500 to be auctioned, and the winning bid is $2,000, then the quid pro quo portion is $1,500 and the contribution portion is $500. But say the winning bid is lower (e.g., $1,000), then the quid pro quo revenue is $1,000. Since the organization did not receive funds in excess of fair market value, no contribution revenue is generated.

Like any sales transaction, the purchased asset must be removed from the organization’s balance sheet by means of an expense like a cost-of-goods-sold component. In both scenarios, an additional quid pro quo expense is recorded to offset the revenue generated with the sale.

Like any venture, the timing, cost, and marketability of a fundraiser should be thoroughly considered. With the right understanding of tax compliance, the administrative burden of recording financials can be eased to help make decisions regarding future events.