What You Should Know About Taxes and Charity Auctions

Charity auctions are a pretty common way for nonprofits to raise money. From elaborate black-tie affairs with high-end items to a local animal shelter with a few items on a table with clipboards by the register at the pet store, auctions are a great way to support your favorite organizations.

Before you start placing bids to help support the organizations you hold close, there are a few things you should know—knowledge that could save you a visit from the IRS.

Not everything is a deduction

While most of the items in a charity auction are donated, meaning the full amount you’re paying is going to support the work of the organization, not all of that is tax-deductible. According to the IRS, “Donors who purchase items at a charity auction may claim a charitable contribution deduction for the excess of the purchase price paid for an item over its fair market value.”

That means only what you pay over what it would cost to buy the item in a store is deductible.

Most items in an auction can be cost-verified with a few simple clicks. A higher-end auction may have rare or custom items that require appraisals to determine the value. In most cases, charity auctions will either give everyone a catalog that has the market value published, or at least have sheets available for each winner to help with filing their taxes.

What if you donate an item for auction?

If you donate an item, you cannot claim the sale price of the item.

If you do donate an item for a charity auction, be sure to get a receipt from the organization. Keep any receipts you have from when you purchased the item in the first place. If it’s art, jewelry, or something else custom or rare, you’ll need an appraisal. Some auctions appraise items as they come in, some require you to get your own. The organization should make that clear.

It should be noted that art can become complicated. Is the art income or capital gains property? If you donate art, you can only deduct what you paid for it. If you’re an artist, you can only deduct the cost to produce the art.

What if you donate the use of property?

It’s not uncommon to find vacation packages in charity auctions. Someone with a second home offers it up, someone else may donate some airline miles and the organization can offer a nice getaway.

You cannot deduct the donation. The IRS does not allow for deductions on partial interests in property. Since you’re not donating the whole property, the government does not see it as having value.

Can you donate a service?

While no one is going to stop you from donating a service—house cleaning, mechanic, anything really—you cannot deduct the donation of your services. It seems the IRS doesn’t see your time and talent as enough to be a deduction.

There are some ways to work around this; however, it would probably cost you more to establish the workarounds than you’d save on your taxes.

What about a raffle?

It’s not uncommon for some larger organizations to raffle off high-ticket items: cars, vacations, or art. The theory is they can sell more in tickets than they would by selling to a single buyer. It’s all for charity, so the more money coming in the better.

One thing to note: if you win a raffle, you have to report that as income. You’ll have to pay taxes on the thing you won. The organization still gets all the money from the tickets, but you’ll owe Uncle Sam.

Good luck and have fun supporting your favorite nonprofit!

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