Q: How is the deductible portion of a ticket to a fund raising event determined? For instance, at a luncheon, is it merely the cost for the food and beverages served or should other event expenses be included, which would result in a smaller deduction for attendees?
A: This question has plagued fund raisers for years, especially since the IRS publication on charitable contributions fails to directly answer this question either in its descriptive passages or its examples. However, an IRS agent helped me clarify this. Fair market value does not hinge on the organization’s expenses, but rather on the “value of the benefit received.” This means that the fair market value may exceed the cost of food and beverages but conceivably be less than the organization’s total cost per person in putting on the event.
Let me give you an example. You hope to attract 200 people to the luncheon you referenced above. You have negotiated food and beverage costs at $40 per person including tax and gratuities, a savings of $10 per person off the hotel’s normal rate. You are offering free valet parking compliments of the hotel – a $10 value. You have also solicited favors for everyone which retail at $25 each. The room rental is $1500, the invitations work out to $4 per person, and decorations add another $1000 to the total. The cost to the organization of putting on this event is $56.50 per person: $40 per person for food, $16.50 per person for the room rental, invitations and decorations, nothing for the parking and favors which are both donated.
In determining the fair market value of the event you would not include the room rental, invitations or decorations because these are not benefits to the individuals, but rather costs to the organization of doing business in this way. However, because the meal, parking and favors are benefits they should be included in the calculation of fair market value, even though the parking and favors are donated. Think of it this way, people are being asked to pay a ticket price equivalent to what they would normally pay if they went out for the evening on their own, where they would pay full price for the meal, parking and take-home treat. In our example, the true price of the meal plus parking and favor totals $85. If the organization is charging $100 for the afternoon the allowable deduction is just $15, not $43.50 as would be the case if basing fair market value on the organization’s costs.
One note of caution: Be sure to specify the fair market value of the event when you promote it. Merely saying something like, “deductible to the full extent of the law” is not sufficient. The IRS considers the cost of the event to be its fair market value unless that figure is broken out of the total cost.