Charity Auction Compliance Requirements: The Essentials
Nothing beats the engagement and fundraising power of a charity auction. And to succeed with an auction, you’ll need the perfect selection of auction items, an organized event game plan, and plenty of marketing.
But if you’re planning an auction for your nonprofit, have you considered the unique compliance requirements of these events?
Charity auction compliance, while not as exciting as the main event you’re planning, is just as integral to its success—if not more important. Neglecting to cover one or more of your compliance needs can open up some serious risks, like:
- Fines, penalties, or criminal action taken against your nonprofit
- Harmed relationships with attendees and winning bidders
- Costly and lengthy financial audits
This sounds like scary stuff, but there’s no need to worry. These risks can be completely avoided by doing your compliance homework ahead of time. This guide will review the essentials that you’ll need to understand before your auction, including games of chance compliance, pre-event considerations, and the tax-deductibility of auction proceeds.
Games of Chance Compliance
Games of chance, including auctions, raffles, bingo, and others, are regulated fundraising activities, meaning different state and local governments may have specific laws in place dictating how they can be run and how the proceeds they generate must be handled. The IRS also has blanket regulations and guidance for 501(c)(3) nonprofits that conduct game fundraising (IRS Publication 3079).
In some states and cities, games of chance are outright banned. Where they’re permitted, games of chance often require licenses granted from the state or local government in advance.
As with other parts of the nonprofit compliance world, requirements and regulations vary heavily from one jurisdiction to another. When planning an auction, your first step should be to check your state and/or city’s specific regulations for games of chance.
If you’re legally able to host an auction in your jurisdiction, there are a few additional regulations you may encounter:
- Winning bids on auction items are typically subject to sales tax in most places. Auction software should be able to automatically apply taxes as needed.
- Some auctions may be subject to unrelated business income taxes (UBIT). Generally, this only applies if the auction is conducted “regularly”, for instance, as a continuous online auction on your website.
- Gaming excise taxes may apply to the proceeds generated by your auction.
- Jurisdictions may require that auction revenue be held in special-purpose bank accounts.
- Auctions may also trigger additional requirements for background checks of staff and special recordkeeping and reporting processes.
Understanding the IRS guidance linked above and researching your state and/or municipal regulations before you invest heavily in planning your auction is essential. This will let you know 1) whether you can host an auction at all, and 2) how you should prepare to handle proceeds and generate reports.
Various Pre-Auction Considerations
Along with the general regulations described above, there are additional compliance considerations to research ahead of your auction:
- Charitable solicitation registration. You’re likely already familiar with the process of registering your nonprofit with state governments to conduct fundraising activities. If you happen to be hosting an auction in a new state and haven’t yet registered there, take the time early on to do so. Even if your auction will take place in your nonprofit’s hometown, it’s always worth double-checking that your registration is up to date, as well.
- Alcohol licensing. Many auctions are held as part of galas or other celebrations during which food and drink will be served. Alcohol licensing requirements vary from jurisdiction to jurisdiction, but they’re definitely not something you want to inadvertently neglect.
- Insurance and risk/safety policies. As with other in-person events you might host, your nonprofit should do its due diligence to ensure safety. For instance, someone should be on staff during the event to monitor hazards like food and drink spills. Review your insurance coverage with your broker to ensure your bases are covered for auction events, especially if you’ll be serving alcohol.
- Donation acceptance policies. As you solicit auction items from donors and businesses, it can be helpful (and prevent undue risk) to outline some specific acceptance policies to include on your donation form. Note the types of items that you can’t accept such as live animals, perishable goods, items with unusual storage requirements, vehicles, etc.
- In-kind donation acknowledgments. Receipts or substantiations should always be provided for donations and in-kind gifts valued at $250 or more, including auction items. Note that it is the donor’s responsibility to appraise the value of a non-cash donation for the purposes of their personal income taxes, not yours. The acknowledgment should include your nonprofit’s name and Employer Identification Number, the date, a description of the donated item (but not its value), and one of these statements:
- A statement that no goods or services were provided in return for the contribution
- A description and good faith estimate of the value of any goods and services provided in return for the contribution, if applicable
- A statement that goods or services provided in return for the contribution were limited to intangible religious benefits, if applicable
Before your auction, you should review your financial reporting and tax requirements again, just to make sure you understand what will be required of your nonprofit and how you should discuss auction-related contributions with donors. Excise taxes, sales taxes, unrelated business income taxes, and other potential variations can vary widely and might impact your planning, fundraising, and communication processes.
Donations made through auctions in the form of winning bids are typically not tax-deductible for donors.
This is because a winning bid is a functional purchase of goods or services, and it’s the same reason why winning bids are subject to sales taxes. This rule also applies to raffles or other games of chance in which donors give money in the hope of winning something in return.
Make sure that your auction attendees understand that payments for won items are, generally speaking, not tax-deductible. However, there is one important exception that will likely come into play during your auction.
The excess amount above an item’s fair market value (FMV) that a winning bidder pays to receive the item typically is tax-deductible.
Determining the FMV of your items is among the most important parts of pricing your auction items for this reason. It shows donors (and the IRS) what a consumer would typically be willing to pay for an item in a normal buying context and makes it clear that any amount paid over it was done knowingly and in the spirit of generosity and competition. FMV information needs to be clearly provided in your auction catalog so that winning bidders will be able to demonstrate that they knowingly paid your nonprofit more than what the item is worth.
It’s important to understand these details so that you can answer any questions from donors that may arise during your auction. And it’s always best practice to provide donors with acknowledgments and receipts regardless of the exact fundraising context. This way they can discuss the tax-deductibility of specific contributions with their accountants or tax professionals.
Any donations that you receive during your event through live appeals, text-to-give, or other outlets should be treated and acknowledged as normal tax-deductible donations.
Auctions are stellar additions to any nonprofit’s fundraising calendar—they’re fun, engaging, and have the potential to generate a lot of support for your cause.
But never forget that auctions bring along a set of unique fundraising compliance requirements that you won’t encounter with other types of events. If you’re planning an auction, take the time now to research both the IRS’s and your state and/or local government’s specific regulations on games of chance.
Working with nonprofit compliance experts is always a good choice to cover your bases, as well, particularly if you’re new to hosting auctions or are hosting an auction in a new state for the first time.
This post was contributed by Franklin Asongwe, Marketing Director, Labyrinth Inc.
Franklin Asongwe is the Marketing Director of Labyrinth, Inc. — the leading provider of state fundraising registration support and other nonprofit compliance services. He’s passionate about helping nonprofits better understand the complex compliance landscape so that they can keep pursuing their missions safely and sustainably.