Non profit organizations that raise funds through events need to let attendees know the dollar amount of the event ticket that is tax deductible for IRS income tax reporting purposes.
Deciding what this amount should be can be a taxing problem (pardon the pun) for many groups, as the following question illustrates:
Where can I find out which portion of an event ticket is tax deductible?
The part that always comes into question is what part of a benefit dinner is “goods and services”? The cost of the food, but not the cost of the wait staff? The rentals? The band that is provided? The things in the goody bag?
I have asked several fundraisers and they all have different views. Accountants want to be very vague and say that this is a judgment call on the part of the charity, but there must be some sort of standard reasoning for these decisions. If you have anything, please let me know.
This is a great question. Perhaps your group has struggled with similar questions as Sue. Let’s take a look at two related issues, first the face value of the ticket and second the tax deductible portion.
Face Value – Ticket Prices
Some organizations base the ticket price on the actual expenses of the event and markup the price just enough as is necessary. A lower ticket price may help raise attendance and may be necessary for some types of events. For example, an outdoor arts festival would naturally be very limited on what could be charged at the gate.
Other types of events have much more latitude on the event ticket prices. Gala events vary greatly in prices from $50 per person to in the thousands. It all depends on what type of event your supporters want to attend and what they are willing to pay.
Tax Deductible Portion of the Ticket
Legal regulations state that donors may only claim a charitable contribution as an income tax deduction when there is nothing of value received in return. When there is some kind of thank you gift or event, the tax deductible amount is that which is left after taking into consideration the value of the gift or event.
First you must determine what the IRS calls the “fair market value” of the event itself, which is normally less than the ticket price.
There are several methods for calculating this. One of the most frequently used is comparison.
Consider what would the cost would be for a similar event if it were not a fundraiser. For example, if a person were to purchase a similar meal at a restaurant of similar status, what would be an average price that they would pay?
For example, you might determine that a semi-formal dinner may have a fair market value of $20 on a $50 ticket. In this case the tax deductible portion is $30.
By using this comparision method, you are in essence taking into consideration the expenses of your event, but also putting those expenses in perspective.
For all tickets $75 and over the NPO must furnish the donor a disclosure statement regarding the tax deductible portion of the donation. However, you may also provide this information for lower amounts as it is helpful to your supporters.
It is the organization’s responsibility to use one of the methods described by the IRS to determine the fair market value of the event and the corresponding tax deductible amount. Anytime you are planning an event it’s good to double check the IRS website to make sure you have the most current information.
Spirit of Fairness
The keyword to remember when deciding on the fair market value is reasonable.
Would it be reasonable to expect a meal that included a salad, vegetable, filet mignon, and gourmet dessert to cost $5 if purchased at a restaurant? Probably not.
But an organization that was holding such a meal could could get a menu or price list from a restaurant in thier area that would provide a similar dining experience and decide on the fair market amount by using this comparison.
The fair market value could vary by several dollars and any amount within a reasonable range would be acceptable for government reporting purposes.
The key point is that the organization is making a fair judgment in an ethical manner and not trying to overinflate the tax deductible amount. As long as your group decides these amounts within a spirit of honesty and common sense, you will be fine.
Be sure to read the IRS resources that address this topic:
Disclosure and Substantiation Rules – (pdf) Good Faith Estimate and Fair Market Value starts on Page 9.
There are also several pages on the Guidestar website with valuable information about events & legal issues: