We have sold at auction in excess of $35 Million for 501(c)(3) organizations since 1996. As such, we are often asked about tax issues relating to benefit (charity) auctions.
The questions/issues we’ve received/addressed involve basically two areas — those pertinent to:
- Contributors to the 501(c)(3) organizations
- Buyers of that property from the 501(c)(3) organizations
The five most material issues for the contributors are:
- Contributors who donate property to the 501(c)(3) are limited in their tax treatment. The law limits a donor’s charitable deduction to the donor’s tax basis in the contributed property and generally does not permit the donor to claim a fair market value charitable deduction for the contribution. For example, if a fur coat worth $2,000 was originally purchased for $1,100, the $1,100 would be the contributor’s deductible amount.
- Contributors who receive something in return for their contribution (of more than $75) to a 501(c)(3) [quid pro quo contribution] are generally limited to the difference between the contribution and the benefit. For example, if an $1,100 fur coat is donated and in return the contributor is given a $500 gift certificate — that deduction would be limited to $600.
- Real and intangible property (and the like) subject to long-term capital gains can generally be deducted at full market value by the contributor to the 501(c)(3). For example, a contributor who donates a vacation cabin on three acres can generally deduct fair market value independent of the auction sale price or basis.
- Vehicles are handled slightly different than other property and contributors are limited in their tax treatment. The law limits the donor’s charitable deduction to the selling price of the vehicle, unless the sale price is $500 or less, where the donor can deduct “fair market value” up to $500.
- Contributors donating $250 or more must have contemporaneous [provided by the time the donor files their tax return and/or the return due date] written acknowledgment from the 501(c)(3) organization in order to take a tax deduction.
The five most material issues for the buyers are:
- Buyers who purchase items at a charity auction may claim a charitable contribution deduction, but only for the excess of the purchase price paid for property over its fair market value. For example, a $500 gift card is purchased for $575 — only $75 can be deducted.
- The buyer must be able to show that he or she knew that the value of the property was less than the amount paid to qualify for a deduction. For example, if a vacation package of undisclosed value is purchased for $7,000 without the purchaser knowing the value was $3,000 at the time of purchase, no deduction can be made.
- In order for a buyer to qualify for an deduction, the value of the property must be disclosed prior to purchase. Per the IRS, a charity may wish to publish a catalog, given to each person who attends the auction, providing a good faith estimate of items that will be available for bidding.
- Buyers may have to pay sales tax and charities may have to collect sales tax. Most states require profit and even non-profit organizations to collect sales tax when selling property, even if their own purchases are tax-exempt. Charities and their auctioneers should check state and local laws in this regard before the auction.
- Receipts provided buyers at the end of the auction (at check-out) should show the amount paid as well as the fair market value of the property purchased so that those buyers may calculate any possible deductions. A statement on those receipts such as, “Deductions may be limited to the excess paid over the fair market value” should be on such receipts.
Here are some links to various relevant IRS forms and publications:
Finally, there are other subtleties, and these 10 considerations are merely suggested to be the most material; to essentially start the discussion. 501(c)(3) organizations and their auctioneers should seek out legal counsel as well as tax counsel to affirm all proper policies, forms and disclosures are in place.
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, RES Auction Services and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College of Business, Executive Director of The Ohio Auction School and Faculty at the Certified Auctioneers Institute held at Indiana University.