I know how to implement a donation system but I'm not sure what to offer those who donate. I'm aware that I could just ask for donations and not give anything back in return as technically they're donating to help the site out, not to get a gift back but I'd like to offer some incentive anyway.

Anyone have any suggestions for something they've used or seen implemented on another site that worked? My site revolves around a particular hobby and consists mainly of user-generated content. So far I think giving donators a special username color would be one good perk but would like to come up with a few more as well.

What you mention is the most common thing-a special avatar or something. Or, you could have members have only a limited PM inbox size-say 10 or 20 PM storage and have benefactors have 50 or 100. Or even give them an email address if you have some available through your host.