Holiday Charity Auctions: Tax Implications To Consider
It's the holiday season, and many of us are looking for ways to give back to our communities and make a difference. One popular way to give throughout the year is by participating in charity auctions, but before you make a purchase at a charity auction, consider the tax implications associated with it.
In this blog post, we'll discuss the charitable contribution deduction, assessing the fair value of your auction purchase, U.S. Treasury regulations section 170 "unrelated use" and its implications, and other tax considerations to keep in mind when bidding on a charity auction item.
What is Considered a Charity Auction?
A charity auction is a fundraising event, usually held by a non-profit organization or charity, in which items such as vacations, art, jewelry, or collectibles are sold to the highest bidders.
Charity auctions are an effective way to raise funds for a cause since they typically bring in high ticket prices and can generate a lot of interest. Proceeds from the auction generally go directly toward the cause or organization that is running the event .
These days, charity auctions can take many forms and be organized in various ways. They may be held either online, in person, or through a combination of both. Online charity auctions allow bidders to participate remotely, while in-person events often draw larger crowds and bring in more bids.
The most popular type of charity auction is the silent auction. In a silent auction, bidders write down their bid on a sheet of paper or enter it electronically, and the highest bid wins the item. Other types of charity auctions include live auctions and open-bid auctions.
Charity auctions can be a great way for individuals and businesses to support a cause that is close to their hearts.
Why do Charities Hold Auctions?
A charity auction gives individuals and businesses an opportunity to support an organization's mission while also enjoying something they might not experience or afford otherwise. In addition to raising money for the nonprofit, charity auctions can create buzz and excitement around the organization.
Charities can use an auction as an opportunity to show off new products and services, generate leads, and attract attention to their work. As guests mingle and bid on items, the organization is able to spread awareness about its mission and encourage more people to get involved.
Are Charity Auctions a Good Way to Give?
Charity auctions can be one way to support an organization you believe in and make a lasting impact on the community. Not only do you get to have fun bidding on unique items, but you also get the satisfaction of knowing that your purchase is helping those in need. In addition, when you participate in a charity auction, you may be able to deduct a portion of your purchase from your taxes as a charitable donation.
Many charity auctions offer tax receipts, so you can confirm with the organization if they will provide one before participating in the auction.
If there isn’t an item of interest, many charity actions will include ways to donate that are not tied to bidding on or receiving something in return. Furthermore, it’s important to remember that what you purchase at a charity auction isn’t always about the item itself; it’s about giving back to the community and making an impact on those in need.
Finally, consider how much money you want to spend or donate. It doesn't have to be a large amount to make a difference — even smaller amounts can help a charity meet its goals.
Are Purchases at a Charity Auction Tax-deductible?
You may be able to enjoy a tax deduction from a charity auction in one of two ways — by donating something or by buying something.
Donating to a Charity Auction
Under certain conditions, you may be eligible to receive a charitable deduction for donations made to a charity auction. The IRS requires that the item donated be used for the organization’s exempt purpose — that is, the mission for which it receives tax-exempt status — in order for you to deduct the full fair market value of your donation. An auction does not qualify as an exempt purpose.
Consequently, if you donated a physical item to a charity, the IRS generally limits your deduction to your tax basis, which is the amount you paid for the item.
Purchasing from a Charity Auction
You may be able to claim part of what you spend at a charity auction as tax deduction. If you purchase an item for more than its fair market value, then you may claim the difference between the auction price you paid and the value received as a charitable contribution.
In summary, if you are looking to purchase an item at a charity auction and take advantage of any potential tax deductions, it is important to understand how much you are paying for the item and what its fair market value is.
As always when dealing with questions about taxes, be sure to consult with a professional tax advisor about how purchases at charity auctions may impact your taxes.
What Kind of Documentation does a Charity Usually Provide?
Many organizations are leery about giving receipts for items donated to or purchased at charity auctions. Charities are often concerned about the consequences they could face if they make major errors in an item's value.
Consequently, if you give an item to be auctioned off, most charities provide you with a receipt describing the item and whether any goods or services were exchanged for it. If you purchase an item from an auction, the letter should state what the item was and how much you paid for it. Charities may also include a fair market value assessment if they have it.
How do you Determine the Fair Market Value of Charitable Donations?
In order to determine the fair market value of charitable donations, it is important to understand what fair market value actually is. Broadly defined, fair market value is the price at which property would change hands between a willing buyer and a willing seller, both possessing all the facts and neither being compelled to enter the agreement.
For items purchased at a charity auction, the fair market value is typically considered to be the price a unrelated buyer would pay for the item. If you paid more than the item’s normal selling price, you may be able to claim a deduction up to that amount on your taxes. For example, if you pay $100 for an item that normally sells for $50, you can probably deduct $50 as a charitable contribution.
When determining the fair market value of an auction purchase, you may need to research similar items sold and compare them to your item. Doing so may help you get an accurate estimate of what your item is worth and confirm that your deduction is appropriate.
Keep in mind that if the IRS believes your donation is overvalued, they may question it and possibly disallow it. Consequently, you may want to keep any receipts, research, or appraisals received.
The fairly complex web of tax issues surrounding charity auctions is governed by a section of the tax code known as Treasury Regulations Section 170 Unrelated Use and Implications. Let's take a quick look at this section.
Treasury Regulations Section 170 Unrelated Use and Implications
If the item donated was considered “unrelated use property” under Treasury Regulations Section 170, the amount deductible will be reduced. Unrelated use property is any item that has significant personal value to the donor and any item that does not have a close relationship to the charitable purpose for which the auction was held.
If you plan to claim the value of a purchase or donation made at a charity auction,you'll want to consult your tax preparer in advance.
While charity auctions can be a lot of fun and often create buzz around an organization's mission, they may not be the most effective — or cost-efficient — way to donate. Often, annual or monthly gifts make budgeting easier for both you and the charity. If you would like to talk about achieving your philanthropic goals, contact Cooke Wealth Management today. We would love to chat with you.