Someone on the board of our 501(c)(3) charity feels we are required to send a letter to each person who bought a ticket for our recent fundraiser to let them know the actual cost of the dinner so they can write off the "donation." The same person feels we have to notify silent auction winners of the actual value of the items they bought compared to the payment. Are we required by law to do this? I can understand having that information available if they ask, but to send out 300 letters...yikes!
Your board member is basically correct. This is the “quid pro quo” rule. In general, if a donor receives goods or services (other than certain low cost items of little value) in return for a contribution, the donor may deduct only the excess of the payment over the value of the goods and services received in return. The comparison is between the payment and the value received, not the cost to the charity of providing the value. Even if the dinner did not cost the charity anything, the donor would be treated as having received the value of the event. In an auction, the payment may be less than the value of the item purchased, in which case no deduction would be permitted because there was no payment in excess of the value received. But if the payment is more than the value, the purchaser is entitled to claim a deduction for the overage.
The Tax Code requires the organization to notify the donor of these amounts if the payment to the charity is more than $75, and the organization can be subject to penalties if it fails to do so. You are not legally required to notify the donor if the payment is less than $75, but most charities do so as a matter of good practice. You can deal with the dinner tickets by providing information in the solicitation request, but since you want to thank your supporters anyway, it isn’t much harder to tell them how much they may deduct for the contribution when you send the thank-you letter. (See Ready Reference Page: “Charities Must Set Value on ‘Quid Pro Quo’ Gifts.”)
Comments from our Readers
In regard to the question of informing donors of the actual amount of their donation, over the 'cost/value' of the item, how can this be accomplished when the donors of the items themselves set the value--which can sometimes seem excessively low or high, and there is no actual 'receipt' for the cost? For instance, someone donates a limited edition collectible claimed to be worth $300, but there is no comparison since the item is no longer available for sale. Items can be researched on E-bay, etc, but values vary widely on items that are found due to many reasons and then the question is raised what value to use--the donor's, which may be incorrect, or the one found through research? Also, some donors prefer not to place a value on the item donated, even on a new purchase as they don't intend to write it off. Is there a standard way of establishing accepted values for items that do not come with a 'receipt' of purchase? Thank you. E.B. --via e-mail.
These issues of valuing donations to charity auctions are always tricky because there are two parties who want valuations, the donors of the items to be sold, and the purchasers of the items at the auctions.
For donors, the valuation usually does not make much difference. If they give services or use of facilities, like a week at their vacation home, they are not entitled to claim any deduction. If they give stuff, like collectibles, they are entitled to take a deduction for the lower of their tax cost or the fair market value. Even if stuff has appreciated in value and they have held it for more than a year, they may deduct only their tax cost because it is not being used in the charitable program of the organization. They are not entitled to deduct the higher value of the items if they are not used in the charitable program.
For the purchasers, they want to know if they are paying more than the fair value of the items. There is no single standard way to establish the value of items not readily available on the market. Research on E-Bay or in other types of catalogues would give an indication. The donor may have a good sense of the value. If you know someone in the field, you could ask for an estimate. Presumably you are not seeking the highest possible value because that would reduce the allowable contribution deduction for the purchaser. Since the value of must auction items is relatively low, in almost all cases less than the $5000 threshold that would require an independent appraisal for the donor's deduction (and set a value for the auction), there is not a huge area for abuse. A reasonable good faith estimate by the charity, based on the information available to it, should be adequate. --Don Kramer
If the food is donated and the auction items are donated, how do we calculate the "cost?" --T.P. via -mail.
The question for the donor/payor is the value of the goods or services received, not the cost to the charity. The cost, if purchased on the open market, is a pretty good indicator of the value, but if the goods or services are donated, there is no cost and the charity must make a good faith estimate of the value. -- Don Kramer
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