Monday, January 24, 2011

Don’t take the “fun” out of fundraising

Monday, January 24, 2011
For many organizations, fundraising and fundraising events are the lifeblood of the organization. In addition to bringing in revenue for the organization, fundraising events also help the organization get its name, and more importantly its mission, in front of a large group of potential donors and volunteers. But, along with the fun and enjoyment that can come with a fundraising event, there are rules and policies that must be followed and established so that your fundraising event doesn’t become an “unfun” raising event (since it’s my blog, I reserve the right to make up words).

Examples of fundraising events include concerts, golf outings, dinners, dances, auctions and carnivals. Obviously, the primary purpose of a fundraising event is to raise additional revenue for the organization. These events are usually planned and executed on an irregular basis and include an exchange of a fair value item. An organization holding fundraising events needs to be very cognizant of the “quid pro quo” contribution and related rules. A quid pro quo transaction occurs when a donor makes a payment partly in return for something, e.g. a meal, a theatre ticket, a round of golf, and partly as a contribution. The difference between the amount paid and the fair market value of the benefit received (the meal, etc.) is the contribution amount which is deductible by the participant. The Internal Revenue Service (IRS) has specific substantiation rules requiring nonprofit organizations to report the amount of the deductible component to the participant. In most cases, the ticket for the event will state that the “deductible” amount of your payment is “X” dollars. As stated above, the organization is required to provide this information to the donor.

The IRS requires separate identification of fundraising revenue and expenses. It is important not to confuse fundraising revenue with other typical types of revenue of a nonprofit organization, such as program service revenue, qualified sponsorship income and straightforward contribution income. These separate categories of income need to be reported in different places on the Form 990. In addition, when an organization’s fundraising revenue exceeds $15,000, the organization is required to attach Schedule G to its Form 990/990-EZ. The Schedule G is used to report additional fundraising information to the IRS such as state registrations, detail for the two largest fundraising events and specific information on any gaming activities.

Another concern with fundraising events is that the organization should make sure that the event will not result in unrelated business income (UBI) and UBI tax. The general rule is that a nonprofit organization’s activity will generate taxable UBI if a three prong test is met. The activity must be:

1. a trade or business;

2. that is regularly carried on;

3. and is “not substantially” related to the organizations exempt function/purpose.

Contrary to popular belief, raising funds so that an organization can continue to carry out its exempt purpose does NOT make the activity substantially related to the organizations exempt purpose. However, on the bright side, IRS regulations state that a fundraising event held on an “annual” basis will not be treated as regularly carried on. In addition, there are certain activities that will allow for a statutory exclusion from UBI. Therefore, proper planning of an event can turn what would be UBI into non-taxable income. The two most common exclusions are the volunteer labor exclusion, where a significant portion of the events activities are performed by volunteer labor, and the exclusion for activities which are carried out for the convenience of the organization’s members.

On a final note, an organization that holds “gaming” activities as a way to raise funds may need to be concerned with some additional issues. Gaming includes raffles, bingo, pull tabs, card games and coin-operated gambling devices…just to name a few. Organizations that conduct or sponsor gaming activities need to become familiar with any federal income, employment and excise tax implications as well as any state requirements for registration or licensing. An organization that carries on gaming activities on a “regular” basis will have a UBI issue to deal with unless one of the statutory exclusions (i.e. volunteer labor) applies. There is also a specific exclusion from UBI for bingo games, if the game meets certain requirements. Other ways to avoid gaming UBI is if the gaming activity is conducted only on an infrequent basis or is substantially related to the organizations exempt purpose (e.g., social/recreational activities to/for members that constitutes the basis for the organizations exemption). There may be other filing requirements in addition to completing the Schedule G and the Form 990-T. For example, a W-2G to report gambling winnings, a Form 845 to report and pay income tax withheld from gambling winnings and any state gaming licensing or registration that may be necessary.

So organizations should continue to go out and raise revenue by sponsoring those “fun” fundraising events. But the organization needs to be careful what it is doing and how things are being done. Know the rules, follow the rules and keep the “fun” in fundraising.


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