Q: We hold a fun-run and charge a $25 registration fee (non-tax deductible) to enter the event. I have two questions. First, if a participant receives a t-shirt ($8), a sports drink ($1), and a certificate ($0), is there a fair market value attached to these items, or can they be placed under the registration fee?
Second, is there a threshold under which items which have minimal value such as certificates or lapel pins may be given without triggering the taxable-benefit issue?
A: Actually, you have three questions here, and they are all good ones since they are ones with which virtually every fund development professional has to grapple.
As I’m sure you are aware, fair market value is, in simple terms, the amount that someone would have to pay if s/he were to buy an item on the open market. Most things have a fair market value. In your example, the fair market value for the items you listed here are likely to be $10 – $15 for the T-shirt (depending on the quality), $1 for the sports drink and nothing for the certificate. This is different from your cost, which is probably closer to the $8 you mentioned for the shirt, $.25 – $.75 per bottle of sports drink and $.10 – $.15 per certificate. These numbers are needed if we are going to assign a donation amount to monies received from people because the ultimate donation allowed by the IRS is the total amount paid minus the value of goods and services received.
The IRS does allow an organization to provide benefits of “insubstantial value” to donors without having to go through the hassle of providing written disclosure statements which specify the deductible portion of contributions. Insubstantial value is defined as having a fair market value not more than 2% of the amount of the payment received from the donor, up to a maximum of $83 (adjusted each year for inflation).This means that your runners would have to make a donation of a minimum of $450 in order to legally receive the $9 worth of giveaways unless your organization’s name or logo is on each of these things and your aggregate cost is less than $8.30. In that case, as long as someone makes a minimum payment of $41.50 (again, this amount is adjusted annually) you may provide the items without worry.
Can you afford to offer the t-shirt, sports drink, and certificate as part of your registration fee and still cover the other costs associated with putting on the fun run – those expenses for which you are charging the registration fee in the first place? If so, you don’t have to worry about which portion is or isn’t tax deductible since you’ve already indicated to the public that there is no donative element in their registration fee. By doing so you’ve in essence told the participants that they are paying for their goodies. In my mind, that’s the cleanest way to go.
Best of luck on the run!
Thanks to Christine Manor, CPA, MBA for watching my back on this one.