Special Event Accounting and Reporting
Most nonprofits have some type of special event that they run during the fiscal year, whether it is an annual event or just a periodic event. Accounting and tax reporting can be tricky for these events. At most of these events, the attendee is obtaining some type of good or service (such as a dinner or entertainment) but is paying more to obtain that good or service than it is worth (because they are trying to contribute money to the nonprofit.) Therein lies the complexity. The good news is that the book and tax ramifications are similar.
Accounting for the contribution portion
Let’s start with the contribution piece. The price of admission that is above and beyond the fair value of the goods and services received is considered a contribution for both book and tax purposes. For example, let’s assume it is a dinner event and the cost of the admission ticket is $50. You could purchase the meal yourself from the caterer (or from a different caterer) for $20. The contribution for both book and tax purposes is $30 (ticket cost of $50 less fair value of goods received of $20). For both book and tax, it is irrelevant if the caterer charges the nonprofit the fair value of $20 or not.
For tax reporting purposes, that means that the fundraising event line item of revenue will be broken down into $30 of contributions and $20 of gross income from fundraising events. The $30 contribution is subject to all the same tax rules as if the person had simply written you a check for $30 and received nothing in return; that means for certain donors, you need to be able to track it separately for Schedule A or Schedule B purposes. As a nonprofit, you have a legal requirement that if the admission ticket was $75 or more, you must provide the purchaser a statement indicating the value of goods or services received. This allows them to do the math on their tax return and determine the contribution they can deduct.
For generally accepted accounting principles purposes, the same $30 is contribution revenue and the $20 is revenue from contracts with customers. The $30 of contribution revenue is recorded when the contribution becomes unconditional. That means unless there is a right of return/release and a barrier, the $30 is recorded as revenue when the ticket purchaser promises to purchase the ticket. If you are selling tickets in the year before the event, that means a portion of “event” revenue (related to contributions) is earned before the event. To “prevent” that from happening, the contribution must be conditional. There would have to be an explicit expectation that if the event did not happen, the contribution would be refundable. That is a business decision that should not be made lightly, just to fix unpleasant accounting requirements.
Accounting for the exchange portion
Now we have the remaining $20, which is gross income from fundraising events (tax) or revenue from contracts with customers (book). This amount is recognized when the event takes place. For tax purposes, this $20 is the amount listed as gross income from fundraising events in the revenue section of Form 990. It will be netted with the direct costs of the items sold/production of revenue. For the dinner, that would include the cost of the food and beverages and potentially the invitation to the dinner. It would not include advertising for the event (which is an indirect fundraising expense), nor would it include the cost of the time that the employees spend planning the event.
In general, we would expect that the net amount reported in the revenue section of Form 990 for income from fundraising would be close to break-even or a positive number (especially if the nonprofit got a discount on what they paid which is more significant than what the average individual could obtain). If instead your net income from fundraising is a large negative amount, either you have allocated expenses that are not directly related to the fundraising event, or you have not properly determined the contribution revenue (and therefore have told your donors they could take too high a tax deduction on their return).
For book purposes, that $20 is revenue from contracts with customers. It is earned when, or as, the performance obligations are performed. Typically, this will be the night of the dinner, when dinner is provided (or the person fails to come to the dinner and is not reimbursed their ticket price). Aside from a potential timing difference between recognizing contribution and revenue from contracts with customers, the non-contribution portion of the transaction has substantially more disclosures that will need to be included in the financial statements.
Accounting for auction items
Frequently these types of special events have auctions of donated items. Let’s presume that a donor provides, at no cost to the nonprofit, an item for the auction with a fair value of $5,000. Both book and tax would record that as contribution income (noncash) of $5,000 when it is unconditional. The excess of the selling price over the fair value will be a contribution in both cases. So, if it sells for $7,500, the remaining $2,500 ($7,500 less the $5,000 already accounted for) is cash contribution. If instead it sells for $3,000, there is no additional contribution ($3,000 less $5,000 is negative). For tax purposes, the lesser of the fair value ($5,000) or amount received ($3,000 or $7,500, depending on the example) is reported as gross income from fundraising events. Also, for tax purposes, the full fair value of $5,000 is an expense (regardless of the amount it was auctioned for) plus any other direct expenses (such as the cost of the auctioneer). This would result in negative net income from fundraising equal to at least the amount of the other direct expenses.
What about sponsorships?
Special events also frequently offer sponsorships. The IRS has specific rules on what can be considered contribution (and non-taxable). Those rules indicate that the sponsor pays the nonprofit with no arrangement of expectation for substantial return benefit. Substantial return benefit includes: a) advertising, b) an exclusive provider arrangement, c) providing more than a de minimus facilities, services, or other privileges to the payor or a person designated by the payor, or d) granting the payor or a person designated by the payor the right to use an intangible asset such as a trademark, patent, or logo of the nonprofit.
Advertising is defined as having qualitative or comparative language, price information, and endorsement, or an inducement to purchase, not just a logo or description of goods. The de minimus exception is set at 2% of the sponsorship agreement. In the tax realm, if the sponsorship does not meet the criteria to be a contribution, it is likely advertising and taxable income.
Generally accepted accounting principles do not have strict guidelines to differentiate between revenue from contracts with customers and contribution revenue. However, a good rule of thumb is that if it is contribution revenue for the IRS, it is contribution revenue for book purposes; if it’s not, it’s not. Do remember, for book purposes, contribution revenue is earned when it is unconditional. That is to say, when there is not both a right of return/release and a barrier. If you do not explicitly indicate in your sponsorship agreements that in the event the special event is cancelled, all sponsorships will be returned, then it is unconditional.
Other considerations in contribution revenue
Accounting and reporting for special events can be very confusing. Book and tax tend to mimic each other but aren’t always intuitive. To determine the contributions, you will take the actual amounts pledged less the fair value of what is being given, regardless of the cost. The contributions may be recorded in a period before the event takes place if they are unconditional. If the ticket price is over $75, the nonprofit is required by law to provide a receipt indicating the value of goods and services the purchaser has received, so that they can calculate the tax-deductible contributions. Sponsorships may or may not be contribution revenue, depending on the goods and services being provided in exchange for the sponsorships.
If you have questions about specific situations, please engage the Yeo & Yeo Nonprofit Services Group to help you evaluate the proper accounting and tax reporting for these special events.