Charity auctions are a popular type of fundraising event among nonprofits. They’re highly engaging for donors, have the potential to bring in large amounts of funding, and can easily become annual traditions for your organization.
However, handling the revenue from an auction is a slightly more complicated process than other fundraisers. Because supporters give by paying for items that were likely donated to your nonprofit (or bought at a discount), you’ll have to manage both monetary and in-kind contributions. Therefore, financial compliance for auctions also differs slightly from other common charity events like charity concerts or 5K races.
In order to protect your nonprofit and maximize revenue from your auction event, you’ll need to understand and adhere to the key aspects of financial compliance for auctions. In this guide, we’ll go over the following areas of compliance:
- Auction Donation Acceptance Policy
- Sales Tax for Auction Items
- Documentation for Auction Donors
- Reporting Process for Auction Funds
- Tips to Maximize Auction Revenue
The best thing your nonprofit can do when it comes to ensuring financial compliance is to talk to an expert, like a nonprofit accountant. In doing so, you’ll have access to a professional who can answer any compliance questions that come up before, during, and after your auction. Let’s dive in!
1. Auction Donation Acceptance Policy
Many nonprofit organizations accept in-kind donations as a part of their auction procurement process. This allows the organization to maximize revenue from that particular auction item—after all, if it was free to your organization, you gain a 100% ROI on it. Plus, by accepting these gifts, your nonprofit will expand its network by connecting with local supporters and businesses willing to contribute to and partner with your nonprofit.
Sometimes, though, your nonprofit may receive in-kind contributions that aren’t desirable to sell at auction. For example, imagine if someone tried to donate a live animal or an item of questionable legality. You can’t accept the contribution without incurring significant consequences to your organization, but declining a gift from a well-intentioned donor may discourage them from engaging with your nonprofit further.
While it may seem unlikely that anyone would contribute undesirable auction items to your nonprofit, remember that they’d probably do so with good intentions. They may be donating items that fit with your auction’s theme or otherwise contribute an item that they believed to be appropriate.
According to Jitasa’s guide to in-kind contributions, a donation acceptance policy can help lessen the blow of declining a contribution by providing legal documentation regarding why you can’t accept a gift. It also helps your organization by creating standards that ensure donors are on the same page as you about donations from the beginning, leading to a smoother process of acquiring auction items.
2. Sales Tax for Auction Items
Consider your nonprofit’s online donation page. When supporters give here, they contribute freely, without expecting anything in return. Auctions, however, work slightly differently. Instead of a one-way, freely given donation, auctions involve two separate financial processes. First, your organization receives in-kind donations of auction items, and then event attendees donate with the condition of purchasing those items.
These conditions may or may not be impacted by the sales tax requirements for your state. While many nonprofits are exempt from paying sales tax when they purchase items, they often have to pay sales tax when they sell items. Exemptions exist for some fundraisers, but auctions may still require this tax in certain states. Do some research to determine whether your organization will be required to pay sales tax on your event tickets, auction items, or other aspects of your event.
Some auction software solutions will collect and remit sales tax for your organization, but you may need to factor additional expenses for adopting that software into your event budget. A cost-benefit analysis can help your organization determine if your projected auction outcomes warrant the investment in one of these solutions. Talking to a nonprofit accountant can also be beneficial for your organization if you’re having trouble estimating sales tax for your event.
3. Documentation for Auction Donors
Your organization should be prepared to provide several documents to your supporters regarding your auction. These documents provide the information they need for tax deductions and for their own records.
Keep in mind that you need to provide documentation for in-kind donations of auction items as well as the monetary contributions made during the event. The two main documents you need to give to supporters are:
Written acknowledgments. Written acknowledgments are required for in-kind donations valued at $250 or higher, but it’s a good habit to send an acknowledgment for every donation you receive. An official acknowledgment letter must include the name of your nonprofit, a description of the donated items, and a statement about the transaction made in return for the contribution (even if no transaction occurred).
Tax deductibility handouts. Tax deductibility handouts are not always required for nonprofits, although they can be useful in explaining the tax deductions associated with the various auction items bought at the event or additional donations made to your nonprofit. Your organization will have an easier time putting this document together with the help of a tax professional.
Access to official documentation allows your supporters to file their taxes more easily the following year, in addition to helping your nonprofit remain compliant with donation regulations during your auction fundraiser.
4. Reporting Process for Auction Funds
Before you host your auction event, you should make sure your nonprofit understands how to report on auction funds and has the right tools to collect and communicate accurate data about the event’s financial outcomes.
Effective data collection is key to ensuring your organization can report correct information on your tax forms. Plus, automated and comprehensive reporting tools will help your nonprofit keep better internal records for future fundraising event planning.
The data you’ll need to keep records on for tax reporting purposes includes:
- In-kind donation estimation totals. Nonprofits who receive $25,000 or more in in-kind donations are required to file a Form 990M. Make sure your organization has an effective system in which you can track all your in-kind giving and determine whether you need to fill out Form 990-M. This can often be made easier through accounting software that organizes your in-kind contribution estimates throughout the year.
- Any contributions that require Form 8283. Donors must file a Form 8283 if they contribute an item or a group of related goods worth at least $500 to your organization. Although your nonprofit doesn’t fill out this form yourselves, you should request a copy of the form from the donor for your records.
- Procurement and sale data. When the procurement and sale of auction items occur in the same fiscal year, you can simply report on the net contribution income. However, if you procure the item during one fiscal year and sell it the next, the financial records become more complicated.
- Event revenue and expenses. Categorize each of the revenue streams you set up for the event, including ticket sales, in-kind donations, contributions made through auction item sales, and any additional giving. Similarly, create categories for event expenses, such as fundraising software, food and beverages, and venue costs.
When you have comprehensive internal reports, you can feel more confident about filing your Form 990 at the end of the fiscal year. Clear reports can also make a nonprofit audit go more smoothly, and they’ll serve as a reference for your organization to account for auction revenue in your future budgets and fundraising plans.
5. Tips to Maximize Auction Revenue
Ensuring financial compliance for nonprofit auctions can be a lot of work, but maximizing revenue from the event will make your efforts worthwhile. After all, the high ROI from nonprofit auctions is a major reason why they’re such popular fundraising events.
To make the most of your auction revenue, try these four tips:
- Take advantage of CSR programs. Double the Donation’s guide to corporate social responsibility (CSR) explains how these initiatives can help your nonprofit obtain event sponsorships and in-kind donations from local businesses. Also, if auction attendees work for a company with a matching gift program, they can submit a request for their employers to match their contributions for donations made.
- Ask for additional donations. In addition to revenue from auction sales, you can bring in more funds by charging a fee to attend the event and encouraging participants to contribute in other ways, such as setting up a donation box or providing a text-to-give number.
- Invest in the right auction software. Choose a software solution with comprehensive features that will help your nonprofit raise more by simplifying the event planning and execution processes without overspending up front. Also, mobile bidding can make the process easier for supporters and allow you to run your auction in any format—in-person, virtual, or hybrid.
- Market your auction effectively. To spread the word about your event to as many supporters as possible, you’ll want to create a comprehensive digital marketing plan. Designing a dedicated page for the auction on your website, using your CRM to send out personalized emails, and leveraging all of your organization’s social media profiles are great ways to market a nonprofit auction.
Slight adjustments such as the ones listed above can help your nonprofit raise more at auction. Be sure to think through all of your event planning decisions so that your auction can reach its full potential while still maintaining financial compliance.
Financial compliance may seem complicated at first, but it’s important to make sure your nonprofit is protected during auctions. Reach out to an accounting expert for help ensuring your auction event is compliant as far as donation acceptance policies, sales tax, donor documentation, and reporting go. When you combine these aspects with adjustments in the planning process to maximize event revenue, you’ll be well on your way to a successful auction.
Special thanks to Jon Osterburg for his expert advice on compliance for nonprofit auctions. Jon has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa.