Nonprofit Finance and Strategyphoto of Steve ZimmermanReal world nonprofit finance matters, and real world thinking about strategies for financial, programmatic, and leadership sustainability. This column is written by Steve Zimmerman, principal of Spectrum Nonprofit Services.

 

Nonprofit Auctions: Compliance Guide with Sample Forms

Auctions are known for two characteristics: they raise money (sometimes a lot), and they are a ton of work. Blue Avocado contributor and CPA Dennis Walsh gives us a handy compliance guide, and even better: five sample forms to make sure your wording is right:

Charitable auctions have stood the test of time as a great way to leverage our consumption-oriented culture for the benefit of nonprofit efforts. And while auctions have been traditionally held at special events, online auctions have recently increased in popularity, making it easier for volunteers and allowing people to bid from their homes and over an extended period of time.

But whether an auction is live, silent, or online, there are compliance issues. This article presents an overview of key charitable auction compliance issues and how to use donor education as part of compliance. With this background, and the sample worksheets and forms included, you can more easily meet reporting responsibilities . . . and reap the benefits with confidence.

Note: Various tax law and regulatory provisions affect charitable auctions, and these laws are subject to interpretation and change. Accordingly, competent professional advice may be needed by organizations, sponsors, and event participants. Except as noted, all section references are to the Internal Revenue Code and Regulations.

Before the auction

Charitable solicitation licensing

Most states have some form of charitable solicitation registration requirement for nonprofit organizations and professional fundraising firms. If your nonprofit is conducting the auction itself, in most cases you will not need to register (assuming you are not required to do so for other reasons).

Certain states also require disclosure of the organization's licensed status on solicitation materials and acknowledgments to donors. Rather than avoiding these requirements, organizations should embrace the added legitimacy that public disclosure of registered status provides. Click here for links to your state's rules.

Auction donation acceptance policy

Consider adopting a written acceptance policy so that you can decline less appropriate gifts with less negative donor reaction. For example, you may want to state on your donation-solicitation form that you cannot accept live animals, vehicles, items with unusual storage requirements, items with significant transfer or handling costs, or items which you do not think can be readily sold at the auction.

Risk and insurance considerations

Like other fundraising events, auctions raise risk management concerns that should be addressed prospectively. Facilities and equipment should be set up with care and for persons of all ages and with disabilities in mind. Assign someone to watch for food or beverage spills and other hazards during the event.

Contact your insurance broker about your upcoming auction to be sure that appropriate coverage and premium is in place. If serving alcoholic beverages, be sure your policy includes necessary coverage. While adding a policy rider for special events is sometimes necessary, requiring the purchase of a separate policy may indicate that your insurer does not specialize in nonprofit insurance needs.

At the auction

Sales tax

Because auctions involve the sale of goods, remember that and most states require nonprofits to collect sales taxes on the sale of goods and services in the same manner as for-profit enterprises. (Even if your state exempts nonprofits from paying sales tax when purchasing items, it may require nonprofits to collect and remit sales tax when selling items.)

However, exemptions from such requirements are common for certain fundraising activities (example: sales tax on hot food sold by volunteers at a youth sporting event event held fewer than six times per year). Be sure you determine if you need to collect state or local taxes on event admissions or auction sales.

An advantage to online charity auctions conducted through commercial providers -- such as BiddingforGood or MissionFish -- is that they will collect and remit sales tax for you. A disadvantage is that they charge; for example, BiddingforGood charges a $595 annual fee and 9% of gross sales.

Documents to give donors

The rules are complicated for how much an individual can deduct from his or her taxes for an auction donation; a summary written to accompany this article can be found here. There are different rules for tangible items than for real estate, for appreciated and unappreciated items, for arts, for services, and so forth. In general, if a donor asks about deductability, suggest they talk to their tax accountant. Even if you give them correct information, they may mis-remember it. 

But you do need to know what documents to give the donor. Most importantly, be  sure to give them receipts and acknowledgements. Just as you must give a written acknowledgment for cash donation of $250 or more, donors must have a written acknowledgment from the charity for each donation of non-cash property valued at $250 or more in order to claim a charitable deduction on their income tax return (see IRS Publication 1771 for exceptions and current year limits).

The written acknowledgment must show:

a) Name of your organization
b) Description of the donated property (but not the value)
c) One of the following:

  • 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 (certain token items may be disregarded) {11}
  • • statement that goods or services provided in return for the contribution were limited to intangible religious benefits

Refer to Exhibit 1 (LINK BEHIND) for a sample acknowledgment of a non-cash donation.

Again, don't make an assessment of the value of donated property received. It is the donor's responsibility alone to substantiate the value of a non-cash contribution for income tax purposes, including obtaining a qualified appraisal when necessary.

And . . . an organization that does not acknowledge a contribution incurs no IRS penalty, but a thank you, like a pancake, needs to be served up fresh. Send a prompt thank you by mail or email. {12}

Auction income and Unrelated Business Income

Is auction income considered unrelated business income?

With certain exceptions, an organization that receives$1,000 or more per year of gross income from business activities unrelated to its exempt purposes must file IRS Form 990-T, Exempt Organization Business Income Tax Return, and will be subject to corporation income tax on its net income from such activities.

To be subject to UBIT, however, the activity must be regularly carried on. The Regulations provide that intermittent activities, including an annual fundraising event, are not regularly carried on, and therefore do not generate UBI (see Treas. Reg 1.513-1(c)(2)(iii)).

Events conducted more frequently may require closer evaluation. For example, a continuous auction held on the organization's website would likely meet this requirement.

Even if regularly carried on however, there are two UBIT exceptions often applicable to auctions and other fundraising activities. If an activity is conducted with substantially all volunteer labor, or the organization sells merchandise substantially all of which is donated, the activity will not be subject to UBIT (see IRC Section 513(a)). For this purpose, "substantially all" is generally regarded to mean at least 85%. (This is the area under which nonprofit thrift stores operate.)

If the activity is regularly carried on and not otherwise exempt from UBIT, and the organization bundles or mixes contributed items with purchased items prior to their sale, the organization needs to track the percentage of purchased items in the bundle/mix. If the annual sales of purchased items are more than insubstantial, then the activity is subject to UBIT (IRM 4.76.51.9).

What about auction sponsorships? Is this advertising revenue and therefor subject to UBIT?

With a bit of care, you can avoid having to treat sponsorship revenue as unrelated business income. Two key areas:

a) Materials may include a sponsor's name, logo or product lines along with the sponsor's contact information and a link to their website (Treas. Reg Section 513-4(f)).

b) Your organization must not provide any type of endorsement or comparative information regarding the sponsor’s products or services (IRC Section 513(i)(2)(A)).

What do we have to report to the IRS about the auction?

If you received a donation for which a Form 8282 was required, and you sell it (or dispose of it) within three years, you it must file Form 8282, Donee Information Return, within 125 days of the disposition and provide a copy to the donor. An exception applies to a single item of $500 or less that was part of a similar group of donated items, provided that the donor signed the statement in Section B, Part II, of Form 8283 and separately identified the item.

Keep copies of all your  Form 8283 papers so that you can easily complete Form 8282 after an auction sale or other reportable disposition.

Special rules for vehicles: The sale of a donated car, boat, or airplane with a value of more than $500 must be reported to the donor on IRS Form 1098-C or an equivalent statement within 30 days of sale and must be filed with the IRS as well.

Auctions and your audited statements

Recorded donated property: Under generally accepted accounting principles (GAAP), in general donated property is recognized as revenue and recorded at fair value at the time of receipt. When subsequently sold at auction, because such gifts in kind are, in substance, part of the same transaction, the difference between the amount received on sale and the fair value when originally contributed should be recognized as an adjustment to the original contribution (FASB Accounting Standards Codification (ASC) 958-605-25-20).

Some organizations prefer to record the amount of the auction purchase as contribution income and not record the donated item when it is received at all. If the donation and sale occur in the same fiscal year, this accounting convenience results in the same net contribution income. However, if the donation occurs in a separate fiscal period from the auction, doing so would result in the omission of contribution income and inventory from the financial statements.

Donated services -- such as a photography session or estate planning consultation -- are not recognized as revenue. Even if they meet the specialized skills requirements for the inclusion of volunteer time in financial statements, they would not meet the requirement that they would typically need to be purchased if not provided by donation FASB Accounting Standards Codivication (ASC 958-605-25-16(b)).

Form 990 differences from above

While an organization may generally follow GAAP for reporting of contributions on Form 990 as well, there are several important distinctions relating to donations of property for fundraising sale.

In contrast to GAAP treatment as a single contribution, property donated for fundraising and its subsequent sale are reported as separate and distinct transactions on Form 990. The difference between the amount realized from the sale of property at auction and the fair value at the time of donation results in a separately reported gain or loss from fundraising events.

Donation of the use of materials, equipment, or facilities is not recognized as income.  Additionally, the donation of services is never recognized as income for Form 990 reporting. Rather, the proceeds from the subsequent auction of these types of items are recognized as income from fundraising events in the period sold.

See {24} for two helpful examples from the Form 990 instructions illustrating the reporting of auction related transactions.  A sample checklist of auction related compliance items, including Form 990 related reporting, is contained in Exhibit 5.

Helpful IRS resources

The following IRS publications and forms are available online at www.irs.gov.

o Pub. 526, Charitable Contributions
o Pub. 561, Determining the Value of Donated Property
o Pub. 1771, Charitable Contributions - Substantiation and Disclosure Requirements
o Form 8282, Donee Information Return
o Form 8283, Noncash Charitable Contributions

Thanks to Adam P. Cohen, CPA, West Hartford, CT Mig Murphy Sistrom, CPA, Durham, NC, and Pamela E. Davis, CEO, ANI/RRG, Santa Cruz, CA for their help in development of the article.

See also in Blue Avocado:

 

 

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Why is Fundraising More About Leadership Than About Skills? editor notes #93

Fundraisers never lack for advice. One board member tells you that foundations should be giving you money, while another thinks we should talk to Bill Gates. The staff thinks you should raising money from corporations. And the friend you run into at the grocery store tells you to raise money via Twitter or on Kickstarter.

The reality is that the board members should be raising money from foundations and major donors. The staff and the executive director should be raising money from corporations. The friend should be raising money for you on Twitter and Kickstarter.

So actually, fundraising isn't about you raising money, it's about all of them raising money. And your job isn't about so much for you to raise money; your job is about getting all of them to raise money.

And right there is the link between fundraising and leadership.

In fact, fundraising has more in common with volunteer management and community organizing than it does with technical knowledge about prospect research or grantwriting skills. Let's start calling fundraisers what they are: organizational leaders and movement builders. And fundraisers: let's start acting like what we really are!

* Are you an executive who followed a founder or longtime executive director with a compelling story to tell? Much of the literature on nonprofit executive transition has focused on the departing executive director. What about the trials, tribulations and triumphs of the person who comes next? We want to interview you for a First Person Nonprofit article; you can choose whether to use your name or stay anonymous. Please send an email and include your contact information and time zone!

* Discounts and free stuff for the next Blue Avocado Bonus Issue: Got a truly unusual and nationally accesible opportunity our 64,000 readers would love? Let us know! Email Susan Sanow susan at blueavocado dot org.

* In this issue: Ten Things Your Board Is Doing Right And Doesn't Even Realize It, Fundraising in Communities of Color, a quick DIY project with bylaws, and a guest humor columnist about a board comprised of cows (yes, cows). And news from our sponsor, American Nonprofits. -- Jan Masaoka and the Blue Avocado team

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Fundraising in Nonprofits of Color

Almost all research on fundraising is done on mainstream nonprofits, and almost all advice and guides on fundraising are addressed implicitly to mainstream nonprofits. Yet because they have different development trajectories, nonprofits in communities of color often have fundamentally different assets and deficits than mainstream organizations of the same size and age.

For instance, imagine two afterschool tutoring programs, each 15 years old, and each with a budget of $600,000. The mainstream program is likely to have been founded by a group of prominent volunteers, mostly white, mostly upper middle income. Today it gets about 70% of its funding from foundations and 30% from individual donors. From its base of founding volutneer donors, the organization had strong writing skills and connections that positioned them for both grantwriting and fundraising events.

In contrast, a parallel tutoring program in an African American or Latino community, for example, is likely to have been founded by a group of community activists, mostly African American or Latino, mostly middle and lower-middle income. With the same budget as the mainstream program, this program gets 95% of its funding from local government, 4% from fundraising events, and 1% from foundations. Its founders had the political connections and savvy to obtain government funding and as an anchor organization in a low-income community, their continued involvement with broader community affairs continues to support their funding strategy as well.

Conventional fundraising advice --

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Adding It All Up: Nonprofit CFO Study

Dilbert CFO cartoonThis survey of 906 nonprofit finance professionals reveals some surprises about these crucial-but-often-overlooked staff, looking at questions ranging from educational backgrounds, workload, board and CEO understanding of finance, and CEO compensation:

Nonprofit finance scandals make for eye-catching headlines: whether about misused public funds, egregiously high salaries, constituents not served, or reserves squandered. But while nonprofit finance scandals make the headlines, the people who manage the funds -- nonprofit finance professionals -- are largely overlooked. And while studies have looked at the tenures and experiences of executive directors (CEOs) and development directors, few have looked at the finance professionals in our nonprofits.

Despite the occasional and highly-publicized problem, the very fact that such problems make the news testifies to the infrequency of such occurrences. Nonprofits are relatively free of financial scandal and abuse, demonstrating both professional expertise and a strong sense of values. But today even the best-managed nonprofits are working not only to steward charitable funds, but to manage earned-income operations, to re-invent their business models, to strengthen the leadership functions of governance, and to maximize the use of funds for mission and values.

Finance professionals are at the core of these efforts.

This study was conducted . . .

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Charity Raters Part II: Managing Your Rating

In Part I of this two-part article, we summarized the features and criteria of six of the best known "charity raters" including Charity Navigator, Better Business Bureau, and others. Many readers added thoughtful comments and noted lesser-known raters as well; we encourage you to read Part I and the posted comments.

Here in Part II, we offer advice to nonprofits on managing their ratings, and comment on the impact of the raters as a whole.

Just two weeks after we published Part I, an unusual three-some of Guidestar, Charity Navigator and the Better Business Bureau issued an unexpected but welcome joint statement " denouncing the "overhead ratio" as the sole measure of nonprofit performance." (emphasis added) (overheadmyth.com) The statement also defends overhead to an extent: "Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems -- as well as their efforts to raise money so they can operate their programs. When we focus solely or predominantly on overhead . . .

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Matrix Map Part II: The Strategic Imperatives

In this article, Steve Zimmerman continues presentation of the Matrix Map model from the book Nonprofit Sustainability: Making Strategic Decisions for Financial Viability.

In our last Blue Avocado column, we introduced the Matrix Map, which you can use to create a visual representation of your organization’s business model. Comprised of all your organization’s business lines (activities), the Matrix Map illustrates how your activities work together towards both programmatic impact and financial viability. For many board members, the Matrix Map provides sudden clarity on how the organization’s different activities inter-relate. But beyond helping them understand the business model, the Matrix Map can help nonprofit leaders strengthen it. 

You’ll recall that putting together a Matrix Map calls for plotting your organization’s business lines according to their mission impact and financial profitability. Depending on where an activity is placed on the map, a strategic imperative emerges. These strategic imperatives are the actions . . .

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Nonprofit Finance People: Take this Survey! NOTE: study now closed

American Nonprofits and Blue Avocado want to learn more about the backgrounds, experiences, joys and frustrations of being in nonprofit finance. If you have responsibilities for the accounting and finance of a nonprofit -- regardless of your position -- please take a few minutes and help with this survey.

Pass this along to your finance friends (CFOs, accountants, board treasurer, and so forth) . . . and stay tuned for the study results! Click here to start the survey. Thank you!

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The Matrix Map Approach Part One: How to Create the Matrix Map

You may have heard of the Dual Bottom Line: the idea that strategic choices must serve both mission impact and financial viability. But how do you turn this idea into a quantitative decision-making tool? Blue Avocado columnist Steve Zimmerman summarizes the Matrix Map approach in part one of this two-part article adapted from the book he co-wrote with Jeanne Bell and Jan Masaoka: Nonprofit Sustainability: Making Strategic Choices for Financial Viability.

It's easy to embrace the concept of the Dual Bottom Line, but harder to apply it in a real-world board setting. For example, board members -- and many staff -- are seldom familiar with all of the programs and activities of the organization. While there may be a strong sense that "all our programs are great," there may not have been any discussion about which programs are, in fact, those with the greatest or most important impacts. Even people with financial expertise may feel uncertain about how to make decisions that are more nuanced than "stick to the budget and at least break even."

Board meetings unintentionally support this kind of fragmentation. They take each subject on its own: first the financial report, then the program report, and then the fundraising report. The Matrix Map aims to change that.

The Matrix Map is a visual tool that plots all . . .

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Deconstructing Sustainability

Maybe in some mythic past it was possible to think first about strategic impact goals, and then about how to raise the money. But today we know better: you can't talk about what you're going to do without talking about how to get the money. And, you can't talk about how to get money without talking about what you're going to do. This piece is adapted from a chapter in Nonprofit Sustainability: Making Strategic Decisions for Financial Viability, by Jeanne Bell, Jan Masaoka, and Steve Zimmerman.

What is sustainability?

Most of us in the nonprofit sector are familiar with setting programmatic goals. For instance, we might set a goal of reducing high school dropout rates by 10% in our community, or a goal of increasing the quality of the observations of one hundred amateur astronomy clubs. Nevertheless, we often aren't sure what our financial goals are, or even what they should be. If the financial goal in a for-profit company is to maximize profit, should our goal be to have $0 profit? Or should it be to grow an endowment of $10 million, or to have a surplus of 5%, or a deficit of no more than $50,000?

In classical economics, the answer to this question is . . .

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Survey on Nonprofit Banking Needs -- please help!

THIS SURVEY IS NOW CLOSED  Thank you!

As a banking customer, you probably have two hats: one related to the nonprofit where you work or volunteer, and one as yourself. As you know, American Nonprofits is creating a credit union (a co-op banking institution) for nonprofit organizations, staff, volunteers and stakeholders can use their deposits for the betterment of the nonprofit sector, rather than for the betterment of Wall Street.

In this survey we'd like to ask you as an individual about what banking and credit services you use or would like to use. As we move forward with the chartering process, the results of this survey will be reviewed by federal regulators and the credit union leadership to define what services will be offered through the credit union. Your input is crucial.

We're sending a special issue of Blue Avocado magazine this week with a customized link to survey your individual opinion.

If in addition you can represent the views of a nonprofit organization, please also take the survey here for nonprofit organizations.

Thank you!

American Nonprofits

Board of Directors

Advisory Board

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