Many organizations don’t have the luxury of a full-time accountant on staff, making the specific, tax-exempt circumstances for nonprofits challenging and confusing.
Charity auctions are a powerful fundraising source for nonprofits, however, and there are many intricacies to keep in mind.
Digital accounting tools, when paired with charity auction software, have made accounting and auction management easy for nonprofits of every size. We’ll cover the basics of accounting for charity auctions and how your organization can navigate them using digital tools, including:
- Acknowledging donated items
- Accounting for sales tax
- Correctly recording revenue
- Filling out your Form 990
- Preparing your auction toolbox
From recording items when they’re donated to reporting the fundraising event after it’s over, this guide covers charity auction accounting from start to finish.
Let’s dive in!
Acknowledging Donated Items
Tax laws are ever-changing. In most cases, donors can claim a charitable tax deduction for making donations and contributions to nonprofits. Luckily, charity auctions fall under this umbrella!
However, you need to prepare the required proof of donation documentation for supporters donating non-cash items valued at $250+. That means providing a written acknowledgment that includes:
- Name of your organization
- Description of the donation, not including valuation
- Statement confirming it was a charitable donation, not a payment for services/products in return
Beyond this basic acknowledgment, your organization may need to submit a Form 8282 to the IRS for gifts appraised at $5,000 or higher, noting when the item is sold and how much it is sold for. While submitting Form 8282 acknowledgments isn’t required for nonprofits, it’s a good-faith accounting practice that your supporters and the IRS are sure to appreciate.
Familiarize yourself with these rules when planning your auction. If you’re looking for additional best practices on running a silent auction, check out this guide by OneCause for more planning tips.
TIP: While there are deduction possibilities, avoid advising supporters on their tax implications and deductions. The reporting rules vary for different items, from tangible items to services and everything in between. Because deductions vary greatly (for example, products are deductible but services often are not), suggest donors speak with a tax accountant for rules regarding their specific donation type.
Accounting for Sales Tax
As a nonprofit, you may not be familiar with sales tax considerations. You’re likely used to collecting donations and using those donations to further the cause you’re working with—not knowing the auction sales tax. Because you are “selling items” these tax requirements that vary by province.
Many provinces require nonprofits to collect sales tax in the same manner as for-profit organizations when selling a product or services.
In some provinces, auctions are exempt from sales tax, while in others, you’ll have to collect for both auction sales and event admissions. You’ll want to look into your province and local tax laws to see whether you need to register your event, and if so, how much you’ll need to collect in sales tax.
Correctly Recording Revenue
Correctly accounting for the revenue brought in by your charity auction can be complicated.
Operating under the International Financial Reporting Standards (IFRS), donated goods count as revenue when they’re received by your nonprofit. However, you sell these donated goods and have different revenue coming in from that. How do you account for both?
If you’re dealing with a large-scale auction, keeping track of the transactions can become unmanageable. Depending on your circumstances you can follow two general accounting principles:
- Revenue is recorded when a donated product is received. When an item is donated, you record the donation as incoming revenue. When that item is later sold at auction, the difference between the initial recorded revenue and the auction price is recorded as an adjustment to the original donation revenue. For example, an item is valued at $20 when it’s donated, but is auctioned for $25. The original valuation is adjusted to match the auction valuation.
- Revenue is recorded when the donated item is sold. The initial donation isn’t recorded. Instead, the sale revenue represents the net income of the transaction. This only works when the two transactions (initial donation, auction) take place in the same fiscal year.
Certain donations have special circumstances going beyond the above outline scenarios. For example:
- Donated services, unlike products, are specifically recorded as revenue upon the auction sale of the services.
- In-kind donations, which are popular with small businesses wanting to make a big impact, are handled in a unique manner as well.
Using digital nonprofit accounting software can dramatically help your organization correctly track and record auction revenue.
Filing a T3010
There are two ways to file a charity tax return in Canada – online through your Business Account or on paper, which can be filled out with the help of an accountant. It is mandatory and you must file your return no later than 6 months after the end of your fiscal year.
Learn more about filing a T3010 here.
Filling out these forms can get convoluted, fast. Consider bringing in outside help, in the form of a bookkeeper or accountant, to make sure everything is recorded correctly.
Preparing your Auction Toolbox
If you’re not working with an accounting expert, make sure you’re employing robust digital auction software tools for your next charity auction.
This software will help you streamline the planning process, including :
- Handling item procurement and logging
- Accepting bids and process payments for successful bidders
- Capturing and storing donation information after auction purchases
- Automatically emailing receipts after purchase
Not every auction software solution will be the perfect fit for your organization, so you want to do your research before investing.
Finally, be sure to invest in accounting software to handle the number-crunching for your wildly successful auction. Check out this guide to browse a few popular QuickBooks options.
Nonprofit accounting comes with its own particular circumstances, and that’s especially true in the case of charity auctions.
Don’t let the specifics deter you from holding one of these lucrative events! As long as you’re recording donations coming in, items auctioned out, and the revenue from that final transaction, you should be good to go. And, if you’re feeling overwhelmed, remember there are digital tools, such as accounting and auction software, to help your organization navigate the process.