A Behind-the-Scenes Look at Fundraising

Often, sometimes too often, a tax-exempt organization’s reach is driven by funding. The programs they support, the employees they hire, and the tools they use are limited by a dollar sign. As a leader of a tax-exempt organization, you must use the funds at your disposal efficiently to accomplish your mission within your cash flow constraints.

Given infinite funding, a tax-exempt organization can accomplish nearly anything, and ambitions are big. Today, tax-exempt organizations are doing their part to rectify issues like hunger, disease, education, and homelessness, and it’s rare when global concerns are matched with global funding. Finding new fundraising streams is a great way to fund your programs while building a network of donors to ensure future cash flow, all with minimal adjustments to your existing tax reporting to disclose any special events occurring during the year.

There are great articles and how-to guides developed specifically for the industry to assist you in implementing special fundraising. These publications give ideas on best practices from an event-planning standpoint; however, this article is a source for how to account for the revenue and expenses from a tax compliance perspective.

The methodology for reporting fundraising events is unique depending on the type of event held and the amount of income received. To narrow the scope, we will review the most common events: galas and auctions.

The Same, but Different…
Form 990 has been designed to capture information for all events on a “net-basis.” This means gross income derived from each fundraising event is distinctly reported on the tax return and subsequently offset by any direct expenses incurred by the event. For organizations with smaller events, less detail is required to be disclosed; however, if the total gross special event revenue exceeds $15,000 during the reporting year, the filing organization is required to detail its two largest events as discrete profit and loss statements on a supplemental disclosure (Schedule G, Part II).

For accurate tax reporting, each fundraising event should have distinct accounting records that chronicle revenue and expense related to each event rather than all events in total. Overhead allocations aside, direct expenses associated with an event should only be presented as offsetting each specific event’s revenue on the Schedule G disclosure. Not only is this advantageous from a tax disclosure perspective, it could be beneficial for profitability and decision making within the organization.

A Night to Remember…
In 2016 (the most recent information available), the Metropolitan Museum of Art generated just over $21 million in contributions from fundraising events, with more than half of that amount coming from the Met Gala. While the Met Gala is considered one of the most fashionable events of the New York social calendar, smaller-scaled galas mimicking the soiree bring significant contributions to organizations of all sizes. The synergy of bringing people together for a cause aligned with their beliefs, where the spirit of giving is palpable, can culminate in a significant bump in revenue in a single night. It is worth ensuring this revenue is accurately recorded.

For every gala ticket sold, the organization receives two streams of revenue, a “quid pro quo” payment and a contribution. The quid pro quo payment is an offset of the fair market value the attendee receives with the purchase of the ticket. This includes the cost of dinner as well as any entertainment. For example, if an attendee purchased a $100 gala ticket that includes a catered dinner with a fair market value of $40, the quid pro quo portion of the ticket sale is $40. The quid pro quo component is not dependent upon actual attendance. If an individual purchases a ticket, but does not attend the event, there is still a quid pro quo component to their purchase.

Amounts in excess of the quid pro quo portion of the ticket sales are a contribution ($60 in the example above). Gala tickets are sold with a markup and attendees understand the additional funds are for a good cause. The contribution portion is presented separately from the quid pro quo portion of the ticket sales on Form 990. This level of transparency ensures potential donors know how much of their purchase goes to the cause in question.

Going Once…Going Twice…
Another exciting way to raise funds for an organization is an auction. Auctions engage participants by appealing to a competitive human urge coupled with altruistic goals. Often the items auctioned are donated by third parties to show support of the organization’s mission, thus reducing overhead associated with the event. The pathway to isolating contributions associated with an auction can be complex and the details are important. Treatment differs regarding how the auctioned items were obtained (purchased versus donated) as well as the amount of the winning bid (above or below fair market value).

When a third party donates an item to be auctioned, a noncash donation is recorded by the organization at the item’s fair market value at the time of donation. The contribution is not reported as a contribution related to the auction on Schedule G. Instead it is a general noncash contribution held as inventory, to be sold later.

When auction items are sold, the revenue is bifurcated between a quid pro quo element and a contribution. The amount of each depends on the items winning a bid. If the winning bid exceeds the fair market value of the item auctioned, the contribution is the amount exceeding the fair market value, thus the quid pro quo portion is the fair market value itself. If the winning bid is less than the fair market value, there is no contribution element, and the quid pro quo amount equals the cash received.

For example, a third party donates a laptop with a fair market value of $1,500 to be auctioned. If the winning bid is $2,000, the quid pro quo portion of the winning bid is $1,500, and the contribution portion is $500. Rather, if the winning bid is $1,000, the quid pro quo revenue is $1,000. Since the organization did not receive funds in-excess of fair market value, no contribution revenue is generated.

Like any sale transaction, the purchased asset must be removed from the organization’s balance sheet by means of an expense, similar to a cost of goods sold component. In both scenarios, an additional quid pro quo expense is recorded to offset the revenue generated with the sale.

Should Events Be Part of Our Strategy?
Fundraising events can be intimidating to some organizations. Of course, galas and auctions incur expenses along the way. Funds are designated to attract donors and venue rentals, professional planners, entertainment, and food generate expenses that offset any revenue earned. Some suppliers are willing to donate goods and services; however, reality often generates invoices that must be paid. While not all organizations will plan events as large or expensive as The Met Gala, the responsibility to use funds efficiently for fundraising requires analytic review. Like any venture, the timing, cost, and marketability of an event should be thoroughly considered before its undertaking. Supplied with the understanding of the related tax compliance, hopefully, the administrative burden of recording the financials of fundraising events has been eased in order to help make decisions regarding future events.

Jason Jackson
Jason Jackson | Tax Administrator