Have you ever heard a nonprofit auctioneer calling out, "Folks, let's get those bids up, you'll help a great cause and get a tax deduction!"? Or, have you received an email from your local nonprofit's volunteer coordinator saying, "Please help out on this project -- and remember, your time is tax deductible!"?
Such messages are certainly well-meaning. And theyve got the right idea as far as reminding people of the various incentives for giving. Unfortunately, when it comes to the tax rules, they're also dead wrong.
Let's assume that you yourself, as a leader in your nonprofit, know the basics about charitable tax deductions, and would never make the mistake of sending messages like these. But notice that in the two examples, it wasn't someone in a high-level fundraising or leadership position doling out the wrong information. It was coming from the worker bees in the fundraising hive, those who don't necessarily spend their spare time at nonprofit-related seminars or reading the relevant literature. Some of them, perhaps young or chronically underpaid, may themselves have never even itemized tax deductions. The idea of tax deductibility is, to them, a pleasantly abstract concept.
So let's take a look at where nonprofits commonly go wrong in their statements about tax deductibility, and how to catch those errant messages before they add to the publics confusion. There's no need for you to attend night classes in tax law -- just learn where trouble is likely to lurk, and make a habit of communicating these basics to others.
Trouble Spot #1: Auction Bids
Bad news for the bargain hunters at charity auctions: If their winning bids are at or below the actual market value of the item bought -- for example, they pay $3,000 for a Hawaii trip where the airfare plus accommodations are worth precisely $3,000 -- they don't get a tax deduction. It wont matter if the airfare was donated or the accommodations are at your board member's timeshare. What matters is the amount that the bidder would have paid for the same thing on the open market, and whether or not he or she bid over that amount.
As Hydeh Ghaffari, a CPA based in Oakland, California (who served as an adviser for Nolo's book, The Volunteers' Guide to Fundraising) explains, "I see many organizations assume that because, for example, a painting was donated to them, they don't need to estimate its value for purposes of advising the buyer who buys it at an auction. That's not the case -- nonprofits should advise the buyers what portion of their payments are not a contribution, regardless of whether the nonprofit received it for free or paid less for it."
Of course, if the bidding goes crazy and someone pays $10,000 for a backstage tour of your theatre, that bidder will be doing some happy itemizing of a charitable deduction next April. The donor will just need to subtract out the fair market value (FMV) of the item bid on -- which it's your nonprofit's job to estimate for them, in your auction receipts and thank-you letters. What if you don't? Ghaffari says, "It could catch up with your group someday -- most likely because one of your donors gets audited, and then shows the IRS the letter from your group as support for the claimed tax deduction."
So, tell your auctioneers to leave the words "tax deduction" out of their patter, and make sure your receipts and thank-you letters state the FMV of the goods bought.
Trouble Spot #2: Thank-You Gifts
Auctions aren't the only instance in which donors might receive something in return for a contribution. Your nonprofit may send out thank you gifts, such as mugs, T-shirts, or tote bags. Unless they're of token value or low cost, these also need to be subtracted out of any claimed contribution.
The confusion here tends to arise as to what is "token" or "low cost." According to the IRS, for 2011, goods or services that bear your organization's logo can be considered "token" if they cost your organization no more than $9.70 and the contribution you received was at least $48.50. And an item is considered "low cost" if its FMV was either 2% of the donor's payment or $97, whichever is less. (You probably won't find your nonprofit offering many gifts worth as much as $97 -- the donor would need to give at least $4,850 in 2011.) Note: For 2012, these amounts will go up to $9,90, $49.50, and $105.
To avoid having to advise donors of the value of these thank-you gifts (and their having to subtract that amount out), keep an eye on the prospective gifts' cost as well as their fair market value. Take note of the benefits of creating logo merchandise for purposes of qualifying for the token exception. Then, when offering gifts in return for suggested donations, be sure to calculate their relative values so as to come within the IRS exceptions.
Trouble Spot #3: Raffle Ticket Purchases
Even as you read this, a volunteer somewhere is probably calling out, "Get your raffle tickets here, only $5 apiece, and the cost is tax deductible!" The IRS rule here is painfully clear: Buyers of raffle tickets can't deduct their cost, period. (Let's hope the volunteer in this example is at least in a state where nonprofits are permitted to hold raffles.)
The market value of the possible prizes doesn't matter one bit. According to the IRS, amounts paid in games of chance (such as raffles, lotteries, or other drawings) don't qualify as donations or gifts to begin with, so naturally donors can't deduct any part of them.
If you've got volunteers out selling raffle tickets, include this tidbit of information in their trainings. You'd also be wise to include a statement on the raffle tickets themselves advising buyers that the cost is not tax deductible.
Trouble Spot #4: Garage Sale Purchases
Buyers of goods at a garage sale are presumed to be paying market value for them, so the buyers don't get a tax deduction. But people who donate actual goods to the nonprofit can take a tax deduction, subject to certain limitations. Fortunately, it's not your nonprofit's job to set a value on in-kind donations -- you should describe the donation on the receipt, if possible, but not attempt to appraise it.
Trouble Spot #5: Meals and Entertainment
If you hold an annual dinner, a gala, or something similar, you'll have to address the fact that ticket purchasers cannot deduct the entire ticket price amount. Once again, unfortunately, it doesn't matter if the food, wine, and entertainment were donated to your organization. In sending out receipts and thank-you letters to ticket buyers, you'll need to advise them to subtract out a particular dollar value for their evening of entertainment.
To set this value, factor in things like how much similar dinners cost at local restaurants and how much tickets to see the same band or musical group would normally cost, then make a reasonable estimate of the event's value to the donor.
Given that many of these events cost more to put on than can be covered by the ticket sales -- and rely on things like corporate sponsorships to turn a profit -- it's no surprise that, as Hydeh Ghaffari says, "A number of nonprofits have no choice but to put a value on the dinner and music that's higher than or equal to the ticket price."
Trouble Spot #6: Donations of Services or Uses of Property
Generous members of your board and community might donate things like use of their property for your next retreat, a free haircut or swim lesson to a winning silent auction bidder, and so forth. Send them a particularly grateful thank-you letter, because they're not getting any tax deduction for such gifts of services or uses of property.
Trouble Spot #7: Volunteer Time
Volunteers probably overlook some of the tax deductions they can receive, such as for car, transportation, and other out of pocket expenses, as well as the cost of any required uniform. The big thing they cannot deduct, however, is the value of their hours -- not even if they are highly skilled, such as a lawyer or graphic designer.
For more practical tips on fundraising, see The Volunteer's Guide to Fundraising, by Ilona Bray (Nolo). And for further detail on the tax rules, see Every Nonprofit's Tax Guide, by Stephen Fishman, J.D.