The following is a guest post from Handbid, and CEO & Founder of Foundation Group, Greg McRay.
Your nonprofit has to remain compliant with a number of state and local laws simply to get started with fundraising in general. There are compliance hoops if you want to accept straightforward financial donations and avoid paying taxes on those donations.
In auctions, the donors are the ones donating the item. And, the event guests (purchasers) are most often just completing a retail transaction. There is the possibility that a purchased item has some portion that can be considered a donation, but not all of it.
With that in mind, are there any compliance requirements that you need to keep in mind, beyond the baseline fundraising regulations that you’re already aware of? Yes!
In this guide, we’ll provide an overview of charity auction compliance and discuss five compliance considerations for your organization. Let’s get started.
Let’s be honest — charity auction rules are often more “helpful guidelines” than regulations carved in stone. You’ll probably outline a few general parameters for the event, like requiring guests to pick up/arrange transportation for won items and not allowing bids to be canceled. However, you also might allow for a little wiggle room to keep guests happy during the event itself.
That’s fine! There’s no higher power dictating that you have to rule over your nonprofit’s auctions with an iron fist. However, there are a few external regulations that your organization is required to follow (or risk a few unwanted consequences).
Charity auction compliance refers to the overarching regulations and rules that your organization needs to follow before, during, and after hosting an auction. These could be regulations set by state and local governments, which can get tricky as events go online and the question of which state(s) your organization needs to be compliant with comes up. These rules could also be set by any mobile bidding software you use to bring the auction to life.
Failing to maintain compliance with any general fundraising and charity auction-specific rules and regulations can open your organization up to a host of risks, including:
- Fines and other penalties against your nonprofit
- Harmed relationships with event attendees (especially winning bidders)
- Lengthy and expensive financial audits
And of course, there’s the fact that your nonprofit relies on the trust of your supporters who give their funds with the full belief that you’ll use those funds in a compliant manner. If you fail to do so, it can damage your organization’s reputation with your supporters.
After reading the previous section, you might be feeling a bit nervous about compliance issues with your next auction. Don’t fret — most compliance issues are resolved by following general fundraising and event best practices.
That said, let’s cover the main considerations that you should keep in mind for your next auction, to make sure that all of your bases are covered.
Many organizations are ditching burdensome (and, easily tampered with!) bid sheets in favor of nonprofit auction software solutions, which allow guests at virtual, hybrid, and in-person events to browse items and place bids with their smartphones.
If that sounds like your organization, recognize that there may be policies set by the software vendor that you’ll need to follow when hosting your event. Specifically, there may be an Acceptable Use Policy (AUP) that governs the auction content that you post on and how you use the platform.
This policy could discuss rules such as:
- Describing all auction content listed on the platform truthfully and accurately.
- Establishing the fair market value of any listed content.
Abstaining from artificially elevating bids or making “fake bids” to raise more funds (which is actually illegal).
- Refraining from making changes to auction content once the auction is open.
- Completing all transactions fairly.
- Abiding by all applicable state and local laws.
- Auctioning off only those items and experiences that are appropriate and legal.
- Promptly delivering items to bidders who pay
The AUP is one of those things that’s easy to look over when starting to plan your auction; if you’ve ever lied when checking a box stating that you’ve read the terms and conditions of something, you know what we mean. While it’s unlikely that the auction software will be heavily monitoring your auction, if you’re failing to abide by this policy and are caught, the vendor can suspend your account and prevent you from using the tool to host your event.
Bonus: Check out Handbid’s AUP for an example of this type of policy.
Just like auction software will have AUPs, the credit card processors linked to these platforms often also have restrictions on what transactions can be completed using their software. Some may refuse to process credit card transactions for alcohol, guns, and so forth. It’s best to check for any applicable policies before you begin procuring items, to make sure you’re in the clear!
Beyond that, there aren’t many guidelines about the types of items or experiences that a nonprofit can accept from donors and auction off, other than that they can’t be items that are blatantly illegal to sell to another person (such as illegal exotic animals). You can use basic common sense to figure out what you can and can’t sell — but essentially, if you’d get arrested for selling it more generally, don’t include it in your auction unless you’re looking to make the local news for more than a puff piece.
However, there is a compliance-related consideration that you can keep in mind when it comes to donors: providing written acknowledgments for donated items.
Essentially, this is a quick document that states that the person or company gave an item or experience to be auctioned at your event and that you didn’t pay for or purchase the item. Your organization can’t tell the donor whether their contribution is tax-deductible (they’ll need to chat with their accountant for that information), but if it is, they’ll need this document to claim the deduction.
The acknowledgment should include:
- Your organization’s name
- A description of the donated item or experience (but not the value)
- A statement that no goods or services were provided from your organization, in return for the contributed item
This isn’t a compliance requirement, per se. But, it can go a long way to keeping your auction’s donors happy. Happy donors are generous donors, so it’s a win-win!
A quid pro quo donation is one in which goods or services are provided to the donor, but the fair market value of the received benefit is less than the amount of the donation.
Using our conversation of an auction, this might be a situation where a donor purchases an auction item, let’s say a framed print, for $400, but the fair market value is $100. In this example, the charitable contribution part of the payment is $300.
A disclosure statement should be provided by the organization to the donor explaining the split between the fair market value of the item received vs. the portion to be considered a contribution. It is important to note that any quid pro quo transaction over $75 requires a written disclosure statement. The statement itself should:
- Inform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of any money (and the value of any property other than money) contributed by the donor over the fair market value of goods and services by the charity, and
- Provide the donor with a good faith estimate of the fair market value of the goods and services that the donor received. The charity must furnish the statement in connection with either the solicitation or the receipt of the quid pro quo contribution. If the disclosure statement is furnished in connection with a particular solicitation, it is not necessary for the organization to provide another statement when it actually receives the contribution.
There are situations where no disclosure statement is required. They are:
- The goods and services given to the donor have insubstantial value as described in Revenue Procedures 90-12 and 92-49. This will usually not be the case in an auction environment.
- The item purchased has only an intangible religious benefit to the donor. Again, this is not a likely situation for an auction item.
Another area of awareness is that of sales taxes. These are state-administered taxes on the sale of goods and services. This can be at the retail or wholesale level, or both. There are local jurisdictions that may add additional layers of complexity onto a state system. Because there are so many jurisdictions, and the rules vary widely, sales tax compliance is beyond the scope of this article. Understand that your auction may generate a sales tax liability. It is incumbent on you to understand the rules of your city and state regarding sales tax collection. You don’t want to be surprised after the fact.
IRS Form 990 is the annual federal information return required of all tax-exempt organizations. For those nonprofits bringing in less than $50,000 per year in gross revenue, you may not have to report details on your auction earnings.
However, for those organizations which bring in more than $50,000, you may be required to file either Form 990-EZ or Form 990. The latter requires substantially more activity detail than the former, but both will require you to detail your auction earnings.
A charity auction is considered a fundraising event. For filers of either Form 990-EZ or Form 990, you may have to prepare Schedule G to provide detail to the IRS on each fundraising event you’ve conducted. The portion considered a donation is reported in Part VIII, line 1c. The fair market value of the item purchased is reported in Part VIII, line 8a.
While your organization may not have set-in-stone rules for how your auction will proceed, there are a few greater compliance requirements set by the local, state, and software “powers that be!”
This guide covers the main charity auction compliance requirements; but remember, your organization will likely abide by most of them, just by hosting a stellar event. Good luck!
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