Nonprofit Accounting: Fundraising Reminders

Fundraising Recordkeeping Tips for In Person Nonprofit Events

The COVID-19 pandemic created an increased need for services provided by many nonprofit organizations, even as those same organizations experienced multiple challenges in delivering the services, including remote work and the cancellation of revenue generating activities and fundraising events.  As more in person events are beginning to take place, and organizations are planning for fundraising events to be in person, there are some important things to keep in mind.

Well-crafted fundraising events can have multiple benefits including increasing awareness of a cause, raising much needed funds and creating favorable publicity for the organization. However, they can also have unintended effects including confusion over the value of goods or services provided at the event, creation of unrelated business income, – and incurrence of donor acknowledgement penalties.

Some common fundraising events include galas, auctions, and golf tournaments. These events generally avoid classification as unrelated business income because they are not regularly carried on. Therefore, organizations that hold more than one event annually often vary the type of event, such as holding one gala, one auction, and one golf tournament. Events like charity walks or bike-a-thons, which do not provide participants any good or service in return for participation are not reportable on IRS Form 990 Schedule G.

As in-person events resume for nonprofit organizations, coordination between the organizations fundraising, marketing, and accounting departments is key to ensure adequate records are maintained and regulations are followed.

The importance of good recordkeeping for fundraising events cannot be overstated. An organization that earns more than $15,000 from fundraising events must disclose in the IRS Form 990 details for its two largest events over $5,000 and provide combined details for all its other events with gross receipts over $5,000 each. Gross receipts are defined as the total event related funds received from all sources, and may include proceeds from sales of goods or services, ticket sales, auction proceeds, contributions and sponsorships. In addition to gross receipts, organizations conducting fundraising events must keep track of contributions, gross income, direct expenses, and indirect expenses. Gross income is defined as the portion of gross receipts that represent fair market value of goods and services provided to participants, including auction items purchased, cash and noncash prizes, food and beverages, and entertainment. Direct expenses are those expenses reportable on IRS Form 990 Schedule G Part II and can include the cost of any goods sold, catering fees and the related food and beverages, golf course fees, facility rental, prizes and entertainment. Indirect expenses are those expenses reportable on IRS Form 990 Part IX column (D) and relate to the cost of getting people to attend the event and donate, and can include solicitations, advertising, and fees for a professional fundraiser.

Event Recordkeeping for Organizations Exempt from Income Tax Under IRC Section 501©(3)

If the organization conducting the event is exempt from income tax under IRC Section 501©(3), it must notify its donors in writing of the fair market value of any good or services. All donors who give more than $250 must be provided with a written acknowledgement. Without this written acknowledgement there is a risk that the charitable deduction taken by the donor will be denied. Note that for donations where goods or services are provided in connection with the donation, the threshold for written acknowledgement is only $75. The written acknowledgement must include the value of the goods or services provided as a return benefit, even if the value is zero, but may disregard items for which the fair market value of the items is 2% or less of the benefit (not to exceed $113 in 2021) or if they consist of low cost items with the donee’s logo (less than $11.30 in 2021). The written acknowledgement must be provided before the due date of the donor’s tax return or an organization can face up to a $5,000 fine per event. Sponsor recognition that has no element of advertising is considered to have no fair market value.

Accounting Considerations for Nonprofit Auction Events

Auctions include two different transactions that are accounted for separately. In the first transaction, the donor donates a non-cash item and the organization recognizes donation revenue and temporarily records the asset as inventory. In the second transaction, the organization sells the inventory item for cash. In the first transaction, the donor made a donation. In the second transaction, the buyer has only made a donation if the amount paid is more than the item’s fair market value, in which case, only the amount paid over the fair market value is treated as a donation.

In addition to federal tax reporting and disclosure requirements, organizations must comply with state regulations, particularly with regard to soliciting charitable contributions. In addition, some states require additional information when using a professional fundraiser.

Questions on event recordkeeping specific to your not-for-profit organization? Contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000. Our not-for-profit team is well versed in these and other not-for-profit accounting considerations.