Throw a Party, Grab a Tax Break

Hosting a fund-raiser can be tax-deductible.

EDITOR'S NOTE: This article was originally published in the May 2009 issue of Kiplinger's Retirement Report. To subscribe, click here.

As director of major gifts and planned giving at the Greater Twin Cities United Way, Barb Beard has always encouraged people to give generously to their favorite causes. But she also encourages them to give creatively.

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Writing a check is valuable, but hosting a charitable event in your home can have an even bigger impact. "These events run the gamut from a small dessert to a full-blown tented event with a live band at someone's lake home," she says.

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Charities love fund-raisers because one event can result in many donations. For party hosts, fund-raisers are a fun way to help an organization. And if you follow IRS rules, Uncle Sam will help foot the bill.

You'll need to get in touch with the benefiting organization at least two months before you send out invitations. Most large nonprofit groups have guidelines to help people put together a fund-raiser.

You won't be able to take a deduction if the organization does not have 501(c)3 tax status, says Morrie Warshawski, a Napa, Cal.-based arts consultant and author of the self-published book The Fundraising Houseparty: How to Party with a Purpose and Raise Money for Your Cause ($20).

"I've had clients who have befriended someone who was in a terrible car accident, and who want to put on a fund-raiser to help pay for medical costs," Warshawski says. "But unless you can somehow set up a foundation, you can't take deductions when the money is going to a specific individual."

In many cases, the benefiting organization will take care of all the expenses and ask you to provide a tax-deductible donation in advance that covers the expected costs. This arrangement requires far less paperwork than tracking the expenses yourself. On the tax form, a sponsorship is considered a cash contribution, rather than a non-cash contribution.

Get Help From the Charity

No matter how the organization wants you to handle the costs, it will likely offer advice and supplies, says Carli Franks, a senior associate for community fund-raising for the American Red Cross of Greater Chicago. "When people fill out our third-party fund-raising agreement and guidelines, we'll look it over and make sure everything's in line," she says. "If they're having a raffle, for example, we remind them they need a raffle license."

Most charities will work with you to determine appropriate ticket prices. However, it's your responsibility to tell donors the fair market value of any benefits they receive (such as a meal) and the total deduction they can take on a contribution.

To avoid raising red flags, you must be confident that the party will generate more in donations than it costs, says Thomas Ochsenschlager, vice-president of taxation for the American Institute of Certified Public Accountants. "If you spend a couple thousand bucks, and you end up getting less than that in contributions, the IRS might argue that this isn't a deductible expense," he says. "They might say it was just having a few neighbors over for a good time."

Save all receipts, including the costs of invitations, food, entertainment and cleaning. Warshawski also advises saving a copy of the invitation. "You want to be able to prove to the IRS that you really did host the event," he says.

Note that you can't write off personal benefits and the value of your time no matter how many hours you spend organizing the event. If you and your spouse host a fund-raising dinner and eat two meals with a value of $50, for example, you'll have to subtract the value of those meals before taking a deduction. Similarly, you can't write off a punch bowl you buy for the party but keep once the event is over. The same is true of any possessions that break or get ruined.

While fund-raisers can be costly, Beard says she's eager to see more people try their hand at such events. "It's a wonderful benefit for nonprofits, which normally don't have the kind of money to do these kinds of events," she says.

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Contributing Writer, Kiplinger's Retirement Report