Critical Tax Reminders for Special Events
- February 16, 2023
- Posted by: Hood & Strong
- Category: Nonprofits
After the pandemic-induced lull, many nonprofits are making up for lost time and fundraising opportunities by ramping up their special events. It’s easy to get caught up in the details that come with event planning, but it’s also important to remember that these functions can have tax implications. Here are some things to keep in mind so you stay on top of compliance.
Increased tax reporting
Tax reporting for an event may require different — and more — information than financial statement reporting does. If your organization adheres to Generally Accepted Accounting Principles (GAAP), you usually must report revenue and expenses related to special events on your financial statements as special event revenue (see “Your financial reporting options,” below). For tax purposes, though, your organization can report some of the event ticket revenue as contributions. For example, if attendees pay more for a ticket to a dinner than the dinner’s fair market value (FMV), the excess would be a contribution.
Tax reporting can require more granular information, too. You report special event data on Form 990, “Return of Organization Exempt from Income Tax.” If you’re reporting more than $15,000 in fundraising event gross income and contributions, you also need to complete Schedule G, “Supplemental Information Regarding Fundraising or Gaming Activities.”
Schedule G requires your organization to report amounts for cash prizes, noncash prizes, facilities rental, food and beverages, and entertainment. If your event includes gaming, you’ll have to answer a series of multi-part questions on Schedule G, too. In addition, you’ll need to allocate income and expenses between the gaming and fundraising event on Form 990.
Different IRS and GAAP treatment of items
Nonprofits often rely on donated services or facilities, as well as the work of volunteers. Although GAAP generally requires nonprofits to record such in-kind contributions and sometimes the value of volunteer time, the IRS doesn’t include them in contributions or expenses.
Say a local print shop donates $1,000 in services, producing posters and programs for your event. You must report a donation of $1,000 in services on your financial statement, with a corresponding in-kind expense. But you won’t report the amount in contributions or expenses for tax purposes.
Goods donated for an event, on the other hand, receive similar treatment on financial statements and tax returns. They’re reported as contribution revenue and, when used, expenses. For example, if a vendor donates golf balls and tees for a golf outing, the donation is a contribution. When the items are used at the event, they’re an expense.
Disclosure to donors
Donors may be confused about the tax benefits they receive from participating in a special event. That’s especially true if it’s their first time participating, and they’re accustomed to simply deducting the full amount of their cash donations. They might not be aware that their deductible contributions are reduced by the FMV of the benefit they receive (for example, the meal, entertainment, round of golf or souvenir t-shirt).
It’s generally up to you to report the value donors receive in a written statement, reminding them to deduct only the excess of their payment over the FMV. Specifically, you must provide the disclosure for payments of more than $75. Note that it’s the initial payment amount that triggers the obligation — not the amount of the deductible portion. Failure to make the disclosure can result in a penalty of $10 per contribution, up to $5,000 per fundraising event.
Even if not legally required, it’s wise to routinely provide special event participants with a statement of the benefits they receive. You’ll make it easier for them at tax time, which could result in the kind of goodwill that leads to future support. You don’t want them to associate your organization with tax hassles.
Ease the burden
Whether for tax or financial statement purposes, you need to carefully track revenues, expenses and related documentation for your special events. We can help ensure that you have the processes and procedures in place to easily collect necessary data.
Sidebar: Your financial reporting options
As noted in the main article, compliance reporting for special events doesn’t just involve IRS tax reporting. Your nonprofit must also report these events on your financial statements.
When it comes to financial reporting for special events, Generally Accepted Accounting Principles (GAAP)-compliant nonprofits typically have three options for reporting in the statement of activities:
- Report the gross revenue as special event revenue and the cost of direct benefits to donors as a functional expense in the expense section,
- Report gross revenue as special event gross revenue and the cost of direct benefits to donors as a separate line item deducted from special event gross revenue, or
- Report the revenue as part special events revenue (for the value of the benefit the donor received) and part contribution (for the excess paid). The cost of direct benefits is deducted from the special event revenue as a separate line item.
If the event isn’t a major or integral activity for your organization, you can simply report the amounts as gross or net on your statement of activities.