Up for Bid! The Tax Rules for Charitable Auctions
Charitable auctions are a staple of charity fund-raising programs raising millions of dollars each year. Donors--and sometimes charities--misunderstand the charitable tax deduction rules for auction items. Can a donor who contributes an item for auction take a deduction for that item, and if so, at what value? Can a participant who purchases an item at auction claim a deduction for the purchase, and if so, at what value? The answers hinge on a variety of factors.
Gifts of Auction Property
Charities depend upon individual and corporate donors to provide the bulk of items for auction. These include goods such as cars, televisions or jewelry; professional services such as landscaping and spa treatment; or vacations that include the use of vacation property or airline tickets. As highlighted in the following examples, the charitable deduction for such gifts depends on many factors including the character of the gift, the type of property and the donor's basis
A corporation's gift of inventory: Corporate inventory, defined as property held by a business for sale in the ordinary course of business, is generally ordinary income property and therefore limited to a deduction of the asset's cost basis. In most cases, this is the asset's wholesale purchase value.
An individual's gift of ordinary income property: Ordinary income property is property that if sold by the individual would generate ordinary income such as capital assets held less than a year, or artwork created by the donor. The donor is limited to the asset's basis (or market value, if that is less than basis) for gifts or ordinary income property.
An individual's gift of a capital asset with long-term gain: While rarely the type of gift contributed for auction, capital assets with long-term gain--such as real estate or stock--may generally be deducted at the asset's market value so long as the charity receiving the gift is a public charity. (Such gifts to private non-operating foundations will be limited to the donor's basis, with the exception of publicly-traded stock considered "qualified" stock.)
An individual's gift of tangible personal property: When tangible personal property--such as wine, a car, purchased artwork or a collectible--is donated for auction, the donor's charitable deduction is limited to the donor's basis (or the asset's market value, if that is lower).
An individual's gift of personal services: Gifts of personal services--such as legal services, consulting services, or a makeover--are never deductible whether the services are offered directly to the charity or offered for purchase at an auction.
An individual's gift of use of personal vacation property: Gifts of use of a personally owned vacation property are gifts of partial interests and are not deductible.
In some instances--especially where the market value of an asset is lower than its cost basis--a donor may be better served to sell the asset, take the loss and contribute the cash to the charity so that the charity can purchase the item to be auctioned. Or, the donor may purchase the item and deduct that cost basis for the contribution.
Advisors should also remind clients about valuation and substantiation requirements for gifts of property other than cash and marketable securities. For gifts of more than $500, a Form 8283 must accompany the tax return on which the charitable deduction is claimed. For gifts exceeding $5,000, the value of the gift must be established by a qualified appraiser. This threshold for qualified appraisals is raised to $10,000 for gifts of non-publicly traded stock. For paintings, antiques or works of art with a value exceeding $20,000, a complete, signed copy of the appraisal must be attached.
Purchases of Auction Property
Bidders get caught up in the spirit of the auction and are encouraged to bid higher to increase their "gift" to the charity. Is a purchase of an auction item a deductible charitable gift? In most cases, the answer is "no"--the purchase is simply an exchange of cash for goods owned by the charity. Only when the purchase price exceeds the established market value can there be a deduction to the extent of that excess. Consider the following two scenarios:
Bidder purchases an item at less than or equal to its market value: When a bidder purchases an asset at auction at a price less than or equal to its market value, it has engaged he has received an asset (quid pro quo) for the funds contributed. From a tax standpoint, this is no different than if the bidder had purchased the property from a retail store. There is no element of gift in the transaction.
Bidder purchases an item for an amount in excess of its current market value (with the intent of making a gift of the excess amount): When the bidder purchases an asset paying a price in excess of the item's current market value, the amount exceeding the market value may be considered a charitable gift. However, it is the bidder's duty to establish the value of that deduction. In addition to valuation issues, the donor must also obtain substantiation of the gift from the charity conducting the auction.
This quick summary exemplifies the complicated nature of the charitable deduction rules. Whether you serve individual donors, corporate donors, or nonprofits, advise your clients about these rules so that charities accurately promote auctions and donors have the opportunity to maximize the value of their auction gifts and purchases.