Is the cost of event tickets tax deductible?
As charitable organizations emerge from pandemic restrictions, in-person fundraising events are beginning to rebound, especially athletic events that are held outside. This is a good time for a quick refresher course on the charitable deduction rules related to events, which can be tricky.
As a general rule, if you purchase a ticket to a fundraising event and attend the event, the IRS only allows a tax deduction for the portion of the ticket price for which you received nothing of tangible value in return. So, when the charity sends a receipt for the gift, you will see that the charity has subtracted the fair market value of the perks--food, beverage, entertainment, T-shirts, and other goodies--from the full amount of the contribution. The rules for raffles, auctions, and games of chance are also complex, exacerbated by the increase in virtual events and online fundraisers.
What’s more, while straightforward gifts to charities from your donor-advised fund at the community foundation are perfectly fine (and indeed, one of the primary purposes of donor-advised funds), it’s problematic to purchase even the charitable component of an event ticket using donor-advised fund dollars.
What’s the reason for all of this complexity? Simply put, tax-deductible dollars cannot be used for private benefit. The whole point of the charitable tax deduction in the first place is to incentivize taxpayers to use their own money to help others. Even when a portion of a donation can be tied to funding the charity's programs, the intermingling of event-related benefits back to the donor (even if it’s just a T-shirt or a chicken dinner) becomes too much of a tangled web, in the IRS’s view, to discern the true amount of the charitable deduction, and without that clarity, none of it is deductible.
The good news here is that the team at the community foundation is on top of it. We are here to answer your questions about the deductibility of certain transactions and how best to deploy your donor-advised or other fund assets to help the charities you care about.
Generational giving through retirement plans, life insurance, and meaningful bequests
August is national Make a Will Month. You’ve likely already worked with your advisors to establish an estate plan, including a will and even a trust. Still, this is a good time of year to review your plan in case things have changed.
As you review your estate plan, consider whether your documents are aligned with your philanthropic intentions, especially if you’ve captured your philanthropic intentions through one or more funds at the community foundation. A fund at the community foundation can be an ideal recipient of estate gifts through a will or trust, or through a beneficiary designation on a qualified retirement plan or life insurance policy.
In particular, bequests of qualified retirement plans can be extremely tax-efficient. This is because charitable organizations such as the community foundation are tax-exempt. This means the funds flowing directly to your fund at the community foundation from a retirement plan after your death will not be reduced by income tax. This also means the assets will not be subject to estate tax.
Don’t overlook life insurance, either. Not only are you able to designate a fund at the community foundation as the beneficiary of a life insurance policy, but in some cases you also may elect to transfer actual ownership of certain types of policies. For example, if you were to make an irrevocable assignment of an eligible whole life policy to your fund at the community foundation, a tax-deductible gift of the cash value of the policy occurs at the time of the transfer. A gift like this could potentially ease your income tax burden, especially if the foundation continues to own the policy and you make annual tax deductible gifts to cover the premiums.
The community foundation makes it easy for you to work with your advisor to draft bequest terms in legal documents, including beneficiary designations of retirement plans and life insurance policies. Please ask your advisor to contact our team for the exact language that will ensure alignment with your intentions. In many cases, anytime during your lifetime, you may even update the terms of a fund at the community foundation that you've designated to receive a bequest upon your death.
What seems charitable may not always be deductible in the eyes of the IRS
With such a wide range of options available for you and your family to support your favorite causes and your community, ranging from crowdfunding to online solicitations, how do you know whether (and why) your donations are eligible for funding out of your account at the community foundation?
In short, contributions to organizations and causes that would fall into the non-tax-deductible category, although worthy investments to help the community, generally are not eligible recipients of grants from your funds at the community foundation. Remember, you received a tax deduction when you transferred assets to your fund at the community foundation, which means the money needs to be distributed to charitable organizations and causes qualified to receive tax-deductible contributions.
If you're interested in the legal background, keep reading!
Section 501(c) of the Internal Revenue Code lays out the requirements for organizations to be considered tax-exempt, meaning they don't pay taxes. This is a status for which an organization must seek IRS approval.
Even under Section 501(c), there are different types of nonprofits that are recognized by the IRS as tax-exempt. To qualify specifically under the Internal Revenue Code Section 170 charitable deduction for gifts to Section 501(c)(3) organizations, the recipient organization must be organized and operated exclusively for “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals.” In other words, “charitable,” according to the IRS, has a very specific definition. Your funds at the community foundation help you support the 501(c)(3) charitable organizations you and your family care about.
Separate from your charitable donations, perhaps you and your family also support social welfare groups (organized under Section 501(c)(4) of the Internal Revenue Code). Examples of social welfare groups include neighborhood associations, veterans organizations, volunteer fire departments, and other civic groups whose net earnings are used to promote the common good. Donations to social welfare groups are tax deductible in only certain cases (e.g., gifts to volunteer fire departments and veterans organizations). Your fund at the community foundation can't be used to support non-tax-deductible civic causes, but certainly you can continue supporting these causes out of your personal assets.
Similarly, chambers of commerce and other business leagues fall under Internal Revenue Code Section 501(c)(6); donations to these entities are not tax deductible, either.
In addition to your civic activities, perhaps you’ve also helped set up a dedicated account at a bank to provide scholarships to the children of an accident victim, or even participated in a GoFundMe fundraiser to help a specific family. These vehicles, along with other crowdfunding platforms, typically do not meet the qualifications for a charitable organization under Section 501(c)(3), usually because the funds are earmarked for a particular person or persons.
We know the rules are complex and can be overwhelming! If you have any questions about the tax deductibility of your contributions to various organizations, and whether your community foundation funds can be deployed to make the contributions, please reach out to the team at the community foundation. We are immersed in the world of Section 501(c) every single day and are happy to help you navigate the rules.
The team at the community foundation is honored to serve as a resource and sounding board as you build your charitable plans and pursue your philanthropic objectives for making a difference in the community. This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. Please consult your tax or legal advisor to learn how this information might apply to your own situation.