September 18, 2018
By: Katelyn Miller, CPA | Nonprofit Tax Manager
Both exempt organizations and readers of the Form 990 often question the presentation of fundraising events on the return. Because the Form 990 presents revenue and expenses in a unique way on Schedule G, Part II, it is common to report a net loss from such events. Fundraising events that “lose” money might seem counterintuitive; however once readers of the form understand the “unusual” reporting requirements of Schedule G they will have a better appreciation as to the actual fundraising results. Accordingly, it is important to ensure that your organization is in compliance with its disclosure of fundraising event activities.
What is a Fundraising Event?
The IRS defines a fundraising event to include “dinners and dances, door-to-door sales of merchandise, concerts, carnivals, sports events, auctions, casino nights…, and similar events not regularly carried on that are conducted for the primary purpose of raising funds”. A common example of a fundraising event for many tax-exempt organizations is an annual gala or dinner. An event where the primary purpose is programmatic in nature is generally not considered a fundraising event. Thus, annual meetings and tradeshows are not considered fundraising events.
Schedule G Reporting
After determining which events meet the IRS definition of a fundraising event, organizations will need to gather the financial information necessary to report event revenue and expenses on Schedule G, Part II. The form calls for Gross Receipts related to the fundraising event to be broken out between two lines: Line 2 – Contributions and Line 3 – Gross Income. Calculating Gross Receipts related to an event is relatively straightforward. However, tax-exempt organizations often struggle in determining how much of the Gross Receipts to report on each line.
Generally, organizations may find it easier to start with the calculation of Line 3 – Gross Income. This line reports the total event revenues not deductible as a charitable contribution for federal income tax purposes because, as explained below, the event has a “quid pro quo” element to it.
An exempt organization is required to provide a written disclosure statement to donors of $75 or more where the payment includes some benefits provided to the donor in return. A quid pro quo contribution is a payment made by a donor to a charity, where the payment is partly a contribution and partly for goods or services provided by the charity. For example, an organization hosts a fundraising dinner. Tickets to the dinner are sold for $100 and attendees of the event receive a meal with a fair market value (FMV) of $40. The organization is required to notify donors that the estimated FMV of goods and services provided was $40, thus limiting their charitable contributions for federal income tax purposes to $60. The $40 fair value of the meal is considered an exchange transaction (a purchase of food) and is, therefore, not deductible. It is important for organizations to note the distinction between cost and FMV when making the FMV estimate: the cost of the meal to the organization does not necessarily equate to the fair value. To illustrate this point, consider an organization that has a dinner event where all of the costs, including room rental, food and beverages are donated to the organization. Even though the organization did not incur any direct costs, the FMV of the event to an attendee is not $0.
When calculating Schedule G, Part II, Line 3 – Gross Income, the organization will take the non-deductible portion of each ticket (the FMV of goods and services provided) and multiply that amount by the number of tickets sold. This calculation will result in Gross Income related to the event. Part II, Line 2 – Contributions can then be calculated as the excess of Gross Receipts over Gross Income.
After going through the exercise above for reporting revenue of a fundraising event, an organization will next need to identify the direct expenses of the event. Expenses may include cash prizes, noncash prizes, rent/facility costs, food and beverages, entertainment, or other direct expenses. While Schedule G expense reporting is more straightforward than revenue reporting, it is important to note that only direct expenses should be included.
How Does a Fundraising Event Generate Negative Net Income?
Form 990, Schedule G, Part II calculates Line 11 Net Income Summary as Line 3 – Gross Income less Line 10 Direct Expense Summary. Line 3 Gross Income is only the non-deductible portion of each ticket (the exchange transaction) and does not include any of the Contribution revenue, which is reported with other Contribution revenue on Part VIII, Line 1. Thus, in calculating the Net Income Summary of a fundraising event, the exclusion of the contribution portion from the calculation often results in a net loss for the event. This can cause concern for an organization as it questions why a successful fundraising event is reported as a loss on the return. Readers of the Form 990 need to understand that a fundraising event may report a loss because the charitable contributions from the event are carved out and reported separately from event revenue and expenses.
For more information about Form 990 reporting of fundraising events and how your organization can maintain sufficient records to accurately complete Schedule G with your return, contact Richard J. Locastro at 301-951-9090 or firstname.lastname@example.org.
Richard J. Locastro, CPA, JD
Partner and Director, Nonprofit Tax