The benefits of tax-deductible donations are twofold for donors. Their financial support enables non-profit organizations to fund programs and initiatives for meaningful causes, and those same donations reduce each donor’s taxable income, resulting in lower year-end tax bills.
However, the U.S. tax code is complex, and there are many rules and regulations that govern donations. For example, donations must go to a tax-exempt organization to qualify, and the full amount of the donation isn’t always tax-deductible. That makes some donation scenarios quite tricky. One such instance involves ticket purchases for fundraising events.
The complexities of ticket tax deductions
It’s easy to assume that, if you’ve bought a ticket to a non-profit’s annual fundraising gala, you can write off the full cost of the ticket. Instead of a donation online or via mail, you’re supporting with a ticket purchase. But that purchase isn’t as straightforward as a standard, one-time donation.
There are two reasons why:
- The event host must have tax-exempt status. That doesn’t necessarily mean it has to be a 501(c)(3); it just can’t be a for-profit business. This can be confusing. Let’s say you’ve bought a ticket for a fundraiser hosted by Bank of America, but benefitting an environmental non-profit. The cost of the ticket isn’t tax-deductible – though the event’s proceeds will go towards a charitable cause, the hosting organization itself isn’t a non-profit. On the other hand, if the environmental non-profit hosts the event directly, then the ticket purchase is tax-deductible.
- As a ticket holder, you receive a benefit in exchange for your purchase. Though you’ve bought a ticket to a charitable event, the full cost of your ticket won’t be donated to the designated charity. That’s because your ticket entitles you to dinner, entertainment, and other perks like a swag bag or entry to an auction. Thus, it’s important to determine what portion of your ticket cost will go to charity and how much is meant to offset the cost of your experience.
How to calculate ticket tax deductions
Event planners must step in to help attendees estimate the deductible amount of their ticket purchase. To do this, the hosting organization should calculate what’s known as the fair market value, or FMV. The FMV isn’t based on the costs to the host; it’s an estimate of how much the evening’s experience would cost were the attendee to seek out similar food, drink, and entertainment on their own. FMV is calculated by determining the event’s overall commercial value and then dividing it by the number of attendees.
Then, the tax-deductible amount equals the cost of the ticket minus the FMV.
Let’s see this in action.
Bob purchases a ticket to a non-profit’s fundraiser for $1,000. The FMV for this fundraiser is $400. Remember, his tax-deductible amount equals the cost of the ticket minus the FMV. $1,000 – $400 = $600. Thus, Bob can claim $600 of his ticket spend as a tax deduction.
Event organizers have a duty to calculate FMV on the front end and communicate it as appropriate to interested attendees. Attendees are responsible for getting an accurate FMV and filling out their tax forms correctly.
With clear communication and a little bit of math, everyone can ensure that charitable organizations receive their due and attendees claim the right deductions.
Need help with the details for your next event? Contact Glow Global Events today.