Many organizations hold special events such as galas, golf outings, run/walks, and more, to help raise funds for their mission and programs. A significant amount of time and effort goes into the planning of these events, including finding a venue, arranging for entertainment, determining if there will be auction items, and other critical details that contribute to the event’s success.
But what organizations also need to consider when planning an event, especially for the first time, is how to calculate the tax-deductible portion of the price of admittance for attendees and donors. In other words, the Organization must first determine what is the fair market value of the event.
This information is not only important to the donors, but to the organization as well because the nonprofit must report all this information on their Federal Form 990.
Throughout the years in my career, the two most common questions I have received from the organizations when I request this information are:
- What does fair market value mean?
- How is fair market value determined?
I am always happy to answer these questions when asked!
I am sharing my reply with you as you will probably have these same two questions at some time in the future, if you have not already faced them when planning past events
To understand what the fair market value (“FMV”) is, you must first recognize that is not the total cost of your event. Instead, the FMV is essentially an estimate of how much it would cost someone to attend the same type of function in a commercial setting. The total cost of your event has many factors such as: venue, on site activities like a band, invitations printing and postage, and flowers or decorations. But not all those costs directly benefit the attendee, but they do factor in your reporting for the Form 990.
The best way to approach determining what the fair market value is by offering a real-world example.
Three friends and I decide to play golf for an afternoon and then have dinner together afterwards. For us to determine if we can afford to do this, we will need to know the price/cost for time on the golf course and dinner in the restaurant. Here are the two facts we will need to consider in determining our costs:
- The average price at a private golf club, where most nonprofits hold golf outings, is approximately $100 per person for green fees and golf carts. For myself and three friends to play 18 holes of golf, the cost will be $400.
- The average price of a meal at a nice restaurant of our choosing is $125 per person, or $500 for four people
The total price for 18 holes of golf and a steak dinner for my friends and me is $900, or $225 per person.
However, when I go to the same golf course and restaurant to attend a nonprofit’s annual golf outing, I am charged $1,500 for a foursome and dinner. Where did that extra $600 come from? Here is the answer: that $600 above the $900 FMV of the event is the portion of my ticket price that will be applied as a donation to the organization.
The ticket price is shown as $900 FMV and $600 is the tax-deductible donation. On a per person basis the breakdown is as follows:
- $1,500 / 4 people = $375 individual ticket price – $100 golf – $125 dinner = $150 tax deductible portion
Every nonprofit must abide by the Internal Revenue Service (IRS) requirement to notify donors of the non-deductible portion of the monies received since the payment for the foursome is over $75. They do this by either thank you letters or notifying the attendee of these amounts on their tickets. This is a transparent and less confusing way to decimate the information.
