Galas look different, but the tax rules are still sticky

For many charities that rely on events to achieve annual fundraising goals, the cancellation of 2020’s Met Gala (which raised an estimated $15 million in 2019) came as a blow, signaling that live galas and auctions might not be back anytime soon.
Still, many organizations are moving forward with virtual fundraisers. What should you keep in mind as you advise clients who routinely support charities through events?

The rules for charitable deductions still apply, meaning that the IRS only allows a tax deduction for the portion of the ticket price for which your client received nothing of tangible value in return. So, when the charity sends a receipt for the gift, your client 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. But, in the case of virtual events, the charity may skip “tickets” and perks altogether, which means your client’s contribution is entirely a donation to the charity itself, with no benefit back to the client.

Regardless, it is still important to consider carefully the implications for your clients who want to purchase event tickets using their donor-advised funds. While straightforward gifts to charities from donor-advised funds are perfectly fine (and indeed, one of the primary purposes of donor-advised funds), it’s problematic for a client to buy an event ticket using donor-advised fund dollars. So problematic, in fact, that the IRS has issued proposed regulations which, if enacted, will confirm its position that a donor-advised fund is prohibited from paying for event tickets on behalf of an advisor to the fund. The regulations would make it clear that the donor-advised fund cannot even pay for the charitable portion of the ticket (the ticket price minus the fair market value of perks flowing back to the donor advisor).

It’s important for your philanthropic clients to pay attention to this. The proposed regulation includes fines for violations that can be imposed on your client as well as on the community foundation or other donor-advised fund sponsoring organization.

To be on the safe side, even in the case of virtual events, be sure to advise your clients that they should not attempt to use money in their donor-advised funds to purchase event tickets of any kind.