QUESTION: Our local unit is having a carnival as both a community event and a fund-raiser. We plan to establish a set fee for entrance, and that will include a dinner (spaghetti, salad, drink and dessert) as well as several carnival games. We are tax exempt under section 501(c)(3) of the Internal Revenue Code, so is the fee that a family pays to attend the carnival deductible by them for federal income tax purposes?
ANSWER:
Possibly, but probably not. When one makes a donation to a qualified 501(c)(3) organization, and in return receives a benefit, only the difference between the amount paid and the fair market value of the benefit may be deducted. For example, if I make a donation to a nonprofit that operates a radio station, and get a tee shirt in return, only the difference between the amount of my donation and the tee shirt is tax deductible. In the case of the carnival, you would need to calculate the fair market value of what the participants will be receiving – dinner and an evening’s entertainment. Keep in mind that it’s the value of the benefit that’s received—not the cost to the PTA of providing the benefit—that’s important. Another way of thinking about it is what you would expect to pay for a comparable event at a commercial establishment. If your fee is significantly above that value, then the difference may be tax deductible. You would also need to let participants knowin advance that they are making a donation in addition to purchasing entrance into an event.
