Hosting a charity auction is a great way to raise money for your organization…but there are compliance requirements that can be difficult to juggle. Check out part one of our auction series here. In part two of our series, we dive into the ins and outs of your post-auction responsibilities.

What do you need to do post-auction?

There are a few things you need to do post-auction. This includes:

Unrelated Business Income Tax (UBIT) - Auction income may be subject to UBIT. Exempt organizations that have $1,000 or more of gross income from an unrelated business activity must file Form 990-T, Exempt Organization Business Income Tax Return.

The activity (the auction in this case) must be carried on regularly to be subject to UBIT. For example, if your organization hosts a continuous auction held on the organization's website, then this activity would likely meet UBIT requirements. However, hosting an annual fundraising event, that only happens once a year would not generate UBIT.

Even if you host a continuous auction, two exceptions apply to auctions and other fundraising activities:

• If the activity is conducted with substantially all-volunteer labor; or
• The organization sells merchandise substantially all of which is donated.

(Substantially all means more than 85%).

What about sponsorships?

To avoid treating sponsorship revenue as unrelated business income, the organization should consider the following:

• Materials may include sponsor’s name, logo, product lines, etc. and
• Your organization must not provide any type of endorsement or comparative information regarding the sponsor’s products or services.

Reporting- If you received donated items and disposed of them later (within 3 years), you need to use form 8282, Donee Information Return to report the sale. If a single item of $500 or less is part of the donated items, you do not need to file form 8282.

How to properly account for Donations and Earnings from an Auction:

Before the Auction, when donations are received:

Typically nonprofits solicit auction items from local businesses. The items donated, are considered in-kind and should be recorded as in-kind contributions. To record an in-kind contribution, the nonprofit should debit an auction item asset account and credit contribution revenue.

For example, if a local photographer donates a wedding photography package for $1,000, the nonprofit would debit the photography package to the auction item asset account for $1,000 and credit contribution revenue for $1,000. This item should be recorded at its fair market value, which is typically provided by the business.

After the Action when final bids have been received:

After the auction is over and final bids have been received, there is a second round of adjustments that are required to be recorded. Any amount above the fair market value of the donated asset increases contribution revenue, and any amount below the fair market value decreases contribution revenue.

For example, an event attendee paid $1,500 for the wedding photography package. The nonprofit would debit cash for $1,500, credit the auction item asset for $1,000, and credit contribution revenue for $500. However, if the event attendee paid $750 for the wedding photography package, then the nonprofit would debit cash for $750, debit contribution revenue of $250, and credit the auction item asset for $1,000.

Don’t forget to check out part one of our series here. Questions? Reach out to our team.