Why Is Fair-Market Value So Difficult?
I had a math teacher in high school who, when asked questions about the basic rules of algebra, would answer, “It’s algebra. You don’t question why, you just do it according to the rules laid out.”
A similar process is used when assessing and reporting Fair-Market Value (FMV)—if a donor receives something from a nonprofit in exchange for their charitable donation. When it comes to FMV, you don’t question why, you just do it according to the rules.
In larger organizations, it is generally understood and implemented without too much drama. But in smaller agencies, FMV can cause arguments. Seriously.
There are three main reasons why this happens. The first is that some executive staff, event committees and even fundraising staff do not understand the need to identify and track FMV. Development professionals often find themselves having to lobby for their organization to follow FMV rules.
The attitude of “do we really have to do this?” is damaging. It assumes the organization does not need to run like a business and adhere to relevant regulations, and the development professional can end up feeling like the validity of what they are saying is being questioned at every turn.
Fund development is a profession; one of the reasons we hire these professionals is to keep track of applicable regulations and make sure our organizations are compliant. As one of my peers says, “Don’t question the validity of what the employee says. Trust that they are giving you the information to the best of their knowledge. Then verify that the information is accurate.” This can be done easily by thanking the employee and asking them to share the source of the regulation, so it can be kept in the agency’s regulatory file.
The second reason for potential angst is that assessing and tracking FMV can be a bit tedious, so organizations don’t want to do it.
The third reason? The required disclosure describing the transaction takes up too much room on the order form or tax acknowledgment letter. (It is amazing how often this one comes up.)
At the risk of sounding like my algebra teacher: Too bad, we have to do it according to the rules—which are set by the IRS. Click here for a resource with good descriptions of the process.
Here’s an example: Awesome charity holds gala
- Ticket price = $150
- Cost of venue rental and catering = $10,000
- Number of guests you are guaranteeing to the venue/caterer = 100
- FMV per person is $10,000/100 = $100
Therefore: The good faith estimate of the FMV of goods and services the donor receives in return for their $150 ticket is $100. The remaining $50 is the amount that may be eligible for a tax deduction to the fullest extent of the law. Most donor relationship-management databases will have a mechanism to track the FMV for each ticket purchased.
Even the IRS realizes that FMV can be a bit of a moving target depending on what elements you consider and how you value them, and they allow us a modicum of leeway, “An organization may use any reasonable method to estimate the FMV of goods or services it provided to a donor, as long as it applies the method in good faith.” In good faith is the key phrase.
Nonprofits interpret this differently. For example, some will include the cost of a band/entertainment in the equation, and some do not. The important part is that an estimation is made.
You may look at assessing and disclosing FMV as an easy step among other things you have to do, or it may seem evil in algebraic proportions. Either way, it needs to be done for each and every relevant gift, and setting up your gift processing procedures to include FMV is a fact of life in nonprofit operations.
For those nonprofit professionals who are in situations where you must convince, plead or cajole your agency into properly dealing with FMV, this article is for you.
Editor’s Note: The author is not a lawyer or a CPA, and information in this article should not be construed as legal or financial advice. Always consult your legal or tax advisor.
Tracy Vanderneck is president of Phil-Com, a Florida-based training and consulting company where she works with nonprofits on fundraising, board development and strategic planning. Tracy has more than 20 years of experience in fundraising, business development and sales. She holds a Master of Science in management with a concentration in nonprofit leadership and a graduate certificate in teaching and learning. She is a Certified Fund Raising Executive and an Association of Fundraising Professionals Master Trainer. Additionally, she designs and delivers online fundraising training classes and serves as a Network for Good Personal Fundraising Coach.