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Your Fundraising Events – On Par with Your Business Sponsors

Does your nonprofit organization intend to hold any outdoor entertainment or recreational fundraising events such as fashion shows or golf tournaments?

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Does your nonprofit organization intend to hold any outdoor entertainment or recreational fundraising events such as fashion shows or golf tournaments?

Does your nonprofit organization intend to hold any outdoor entertainment or recreational fundraising events such as fashion shows or golf tournaments?

As charities hope to soon begin emerging from the COVID-19 crisis they may eventually plan to host major fundraising events again, such as golf outings. Here’s an idea that may help your corporate sponsors receive higher tax benefits in light of a new tax limitation for businesses from tax reform.

Major events are ideal for larger scale fundraising because, along with the support of charitable institutions, they provide potential for tax deductions. However, since the Tax Cuts and Jobs Act (TCJA) was signed into law some deductions have gone away.

Nonprofits want to be mindful of these new restrictions and how events are structured; this will prove valuable in maintaining major sponsors depended on for the success of these events.

Most charities are aware of the “quid pro quo” rules that limit donors’ tax deductions for charitable contributions to the excess of payments over the value of benefits provided to the donors. It’s the charity’s requirement to make a good faith estimate of the value of the goods and services provided to donors to report on your fundraiser’s receipts or solicitations.

For example, if the ticket to a fundraising dinner is $200 per person and the value of the dinner is, say, $80, the receipt should state so and the charitable deduction would be $120.

As another example, a corporate sponsorship at a golf fundraiser costs $2,000, which is $500 each for 4 tickets. The sponsoring business is entitled to a foursome at the golf outing, valued at $300 per person for the food, beverages and day of golf, totaling $1,200. The charitable deduction for the corporate sponsor may be the remaining, the $800, for the 4 tickets.

Corporate sponsors, businesses and business owners, however, often use these opportunities to invite their own clients, employees and prospects to these golf fundraising outings. For them, this is not only a chance to support the nonprofit organization, it’s also a way for them to entertain for business purposes.

Tax reform gave businesses a harsh new tax rule that does not allow any tax deductions for entertainment expenses. Although entertainment expenses are no longer tax deductible, 50% of meals still may be deductible as long as they’re business-related.

The IRS proposed rules earlier this year to clarify the meals and entertainment rules. The guidance indicated that taxpayers may generally continue to deduct 50% of meal expenses associated with their businesses, provided certain conditions are met, including:

  • The food and beverages are not considered lavish or extravagant; 
  • The taxpayer, or the taxpayer’s employees, are present for the serving of meals; 
  • The food and beverages are provided to a business associate; and  
  • When served during an entertainment activity, the amount for the meals must be stated separately from thentertainment on invoices and receipts. 

What this means for the organization holding the fundraising event is it now should offer receipts to those attending that are structured slightly differently than in the past; this can help enhance relationships with key corporate sponsors!

Organizations should separately state the value of the meals and the value of the entertainment on the receipts provided for fundraising events. This will give corporate sponsors documentation they need to best navigate the new tax law restrictions.

So in the example above, for the golf tournament fundraiser that costs $500 per ticket—$300 of which is for the goods/services provided—the receipt should further break out the $300 for the portion that’s for food and beverages and the portion that’s for the recreational golf. If the golf is worth $200 and the meal is worth $100, that should be clearly stated to the sponsor on the fundraiser receipt.

This is not something the tax law requires of the charity holding the event but, should be looked at as a possible “value add” for donor relations. The easier an organization can make it for a sponsor to document what portion is or is not deductible, and to provide the sponsor an opportunity to deduct more of the payment, the better the chances it can retain that sponsor for future events despite the more restrictive tax environment.

It’s important to remember the IRS guidance for the new law makes it clear that nonprofit organizations may not artificially inflate one portion of the value (or devalue another) for tax deduction purposes. The value reported must reflect the actual value of the meals versus the value of entertainment; the IRS made clear its concern for compliance with the intent of the tax law.

The time will come again soon enough, hopefully, when nonprofit organizations will once again be able to hold fundraising events that are enjoyable for donors and attendees and potentially lucrative for charities. Keeping tax law restrictions regarding meals and entertainment in mind, and making it as simple as possible for corporate donors to understand what can be deducted and what cannot, should be one more way nonprofit organizations can maintain strong donor relations.

 

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law. 

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