Nonprofits face unique challenges with financial statement and tax reporting. There are a number of items that are treated differently for financial statement purposes prepared under generally accepted accounting principles and tax reporting which is dictated by IRS regulations. One particularly challenging item is the treatment of special events.
There is confusion among nonprofits surrounding special events profitability. Why would the bottom line reported on Schedule G of Form 990 (as well as line 8c of Part VIII) be negative, which would suggest that a charity actually lost money at its fundraiser(s), when in reality the event generated a profit and disclosed the profit on its financial statements? The guidance on how to understand the complex and sometimes counterintuitive rules and regulations that govern financial statement and tax return preparation are as follows.
What is special event revenue? Many special events, such as dinners, galas, auctions, and shows are organized to raise contributions to support an organization’s activities. The participants of these events are offered something of value (a meal, theater ticket, entertainment, gifts) for a sum that is higher than the price they would pay to a for-profit business for a similar event. Considering the nature of special events, it is logical for nonprofit organizations to inflate the price because the ultimate goal is to raise funds. For-profit businesses, on the other hand, charge a price referred to as “retail value” or ‘fair market value,’ which is the total price charged for a product or service sold to a customer. This includes the manufacturer’s cost plus a retail markup. The difference between what a nonprofit organization and a for-profit business charges is considered by the Internal Revenue Code (IRC) to be an actual contribution. Contributions are also defined by the IRC as “payments or the part of any payment, for which the payer (donor) does not receive full retail value (fair market value) from the recipient (donee) organization.”
It should be noted that a nonprofit organization might have other types of contribution revenue, such as donations of auction items and donated services.
For Generally Accepted Accounting Principles (GAAP) purposes, donations of auction items that result in proceeds above the retail value are recognized as contribution revenue. If actual proceeds are less than the value, the difference reduces contribution revenue. Donations of services are reported as in-kind contribution revenue with an offsetting increase to fundraising expenses. Donated services should not be recorded if they do not create or enhance nonfinancial assets or do not require specialized skills and would not typically need to be purchased.
For IRC purposes, donated auction items are recognized as non-cash contributions as well as non-cash special event expenses on Part VIII of Form 990 and Schedule G. The value of donated services should be excluded from reporting on the tax return all together.
What are special event costs? Most nonprofit special events incur costs for conducting an event. Some of these costs are for items and services furnished to the attendees, such as the catering, venue, decorations, meals and refreshments, etc. Any remaining costs are for promoting and conducting the special event, such as printing tickets, posters and postages, fees for public relations, reasonably allocated costs for employees’ time, and other expenses incurred by the organization. The costs of the items and services furnished to the attendees are referred to as “direct benefits to donors.” These are inducements to attend the special event and are charged to the special event. Remaining costs are unrelated to direct benefits and classified under fundraising costs rather than charged to the special event.
A special event produced a profit for this year but the bottom line reported on Schedule G of Form 990 is negative. What went wrong? Did the nonprofit actually lose money at its fundraiser?
The answer is that nothing went wrong! This apparent loss is artificial.
For GAAP purposes, the special event revenue is reported either at the gross amount or at net of direct benefits to donors. If the special event revenue is reported at the gross amount the costs of direct benefits can either be reported as a reduction of special events under revenue and support or in a separate expense category classified as costs of direct benefits to donors.
This is distinguished from IRC Form 990 reporting requirements. The gross income from the event on schedule G does not take into consideration the amounts contributed in excess of the retail value received from ticket sales. This contribution as well as other cash and non-cash donations related to the special event, is subtracted from both Schedule G and line 8 of Part VIII and reported as part of contribution revenue on line 8 in Part I of Form 990. When the costs of direct benefits are subtracted from special event revenue, the bottom line reported on Schedule G of Form 990 might be negative.
This representation is counterintuitive. When nonprofits look at form 990 they expect to see a net profit from the event just as it is disclosed on the financial statements. In order to reconcile special event net income (loss) on the financial statement to the tax return, the bottom line reported on Schedule G of Form 990 (as well as line 8c of Part VIII) should be looked at in conjunction with contribution revenue related to special event income reported on line 8 in Part I of Form 990.
As you review your financial statements and 990 reports, you may want to ask your accountant to share the reconciling items so that you can understand the difference.
bgr CPAs services the nonprofit industry and can help you with technically difficult issues such as differences in reporting special events. To learn more, please contact Michelle Outerbridge, CPA, CFP at firstname.lastname@example.org or Kate Vasiliev, MS, CPA at email@example.com or (410) 418-4400.