Nonprofits: Special events call for tax planning
Tax reporting may be the last thing on your mind when planning a special fundraising event. But your not-for-profit should carefully track revenues and expenses and retain related documentation now to facilitate the reporting process later. Pay attention to the following issues.
What to report
Tax reporting for an event may require different — and more — information than financial statement reporting does. If your organization adheres to Generally Accepted Accounting Principles (GAAP), you usually must report revenue and expenses related to special events on your financial statements as special event revenue. For tax purposes, though, your organization may be able to report some of the event ticket revenue as contributions. For example, if attendees pay more for a ticket to a dinner than the dinner’s fair market value (FMV), the excess would be a contribution.
Tax reporting can require more granular information, too. You report special event data on IRS Form 990, “Return of Organization Exempt from Income Tax.” If you’re reporting more than $15,000 in fundraising event gross income and contributions, you also need to complete Schedule G, “Supplemental Information Regarding Fundraising or Gaming Activities.”
Schedule G requires you to report amounts for cash prizes, noncash prizes, facilities rental, food and beverages, and entertainment. If your event includes gaming, you’ll have to answer a series of multi-part questions on Schedule G, too. In addition, you’ll need to allocate income and expenses between the gaming and fundraising event on Form 990.
How to handle donations and donors
Nonprofits often rely on donated services or facilities, as well as the work of volunteers. Although GAAP generally requires nonprofits to record such in-kind contributions and sometimes the value of volunteer time, the IRS doesn’t include them in contributions or expenses. Goods donated for an event, on the other hand, are reported as contribution revenue and, when used, as expenses.
Be sure to provide donors with information about the tax benefits they receive from participating in a special event. They might not be aware that their deductible contributions are reduced by the FMV of the benefit they receive. It’s generally up to you to report the value donors receive in a written statement, reminding them to deduct only the excess of their payment over the FMV. Specifically, you must provide the disclosure for payments of more than $75. Note that it’s the initial payment amount that triggers the obligation — not the amount of the deductible portion. Failure to make the disclosure can result in a penalty of $10 per contribution, up to $5,000 per fundraising event.
Even if it’s not legally required, you should routinely provide special event participants with a statement of the benefits they receive. You’ll make it easier for them at tax time, which could result in the kind of goodwill that leads to future support.
When to start organizing
Although it may seem like more work, planning for tax reporting while you’re still in the early stages of your event preparation will pay dividends later. If you need help collecting data or complying with IRS rules, contact us.