Even if they're not looking to make a profit, however, nonprofits rely heavily on fundraising to cover everyday operational costs and continue working towards their missions.
Often, NFPs will even host special fundraising events to raise money and connect with donors—but in doing so, there are some important compliance requirements to keep in mind.
The primary purpose of hosting a fundraising event for an NFP is to generate financial support to cover things like operational expenses and staff salaries. However, these events can also be useful in finding ways to diversify funding.
Rather than relying on one or two primary sources of funding, for example, an event may drum up donations from dozens or even hundreds of donors, reducing an NFP's reliance on any single source.
Aside from bringing in funds, however, these events are also extremely useful from a donor relations standpoint. During these events, NFPs have a chance to garner media attention and speak directly to the public about their cause, which can generate word-of-mouth promotion and more donations.
At the same time, these events are an excellent platform for NFPs to connect face-to-face with donors, building deeper relationships and strengthening their own connections to the local community. Does it get any better than that?
Despite the many benefits of hosting fundraising events for NFPs, there are some strict compliance requirements in place that NFPs must follow if they want to avoid penalties and legal troubles. So, what does your NFP need to know before it decides to host a fundraising event?
Thinking about holding a raffle or offering any kind of gambling activities (such as a lottery) at your next fundraising event? If so, then you'll need to be aware of some specific tax and legal requirements.
For starters, your organization will need to use IRS Form W-2G to report winnings, so be sure to collect information and signatures from any winners that you pay out. From there, if the winnings from an event exceed $5,000, NFPs are required to withhold income taxes or pay those taxes on the winner's behalf.
In addition to federal tax laws regarding gambling winnings, NFPs should also check with their state and local governments for any laws requiring them to register their event. In some cases, fundraising events with a gambling component may not even be permitted in certain jurisdictions, so do your research.
Many NFPs will hold charitable actions as a way of drumming up additional funds, but these auctions can add a layer of regulatory complexity as well. Because purchasing an item at an auction does not qualify as a charitable donation, this can create some confusion for donors.
To handle this, consider providing attendees with a fair market value of the item or service. From there, if an attendee pays more than fair market value at the auction, they can claim that excess amount as a deduction on their taxes.
In handling charitable auctions, NFPs are encouraged to carefully document all items or services donated and auctioned, as well as the total amounts paid. In some cases, special tax forms, like IRS Form 8282 or 8283, may need to be filed as well.
For NFPs providing attendees with meals, entertainment or other goods/services, there are important disclosure requirements to keep in mind. Specifically, if a donor's payment totals more than $75 and they receive a good/service in exchange, this needs to be reported on a written disclosure statement.
In this statement, NFPs should include an estimate of the value of all goods and services provided, as well as a disclosure that a portion of the payment made is not tax-deductible.
Last but not least, NFPs should always defer to state law when it comes to sales tax on items donated to the NFP for the event and any sales made during the event. In some states, NFPs may be required to collect and pay sales tax, so it's a good idea to check with your state to determine what your specific sales tax requirements are before an event.
Navigating the complexities of reporting and compliance requirements for a fundraising event can be challenging, but by keeping detailed records and making sure that you're filing the right tax forms, it is possible to host a successful fundraising event without added stress.