Charitable Nonprofits. Games of Chance.
Most charitable nonprofits do great work for the communities they serve. To do so, they need a steady flow of funds to perform those good works. Often, they use a variety of trade promotion vehicles for fundraising, such as sweepstakes, contests, raffles, bingo, casino nights, poker games, and other forms of games of chance. But sometimes they cross the line into illegal activities.
For example, some charitable nonprofits assume, falsely, that ALL raffles, auctions, fantasy leagues, and casino nights are legal. Not so.
Games of Chance.
Some states allow charitable nonprofit organizations to conduct games of chance. However, depending on the state, these activities can be illegal and result in unintentional consequences not only for the charity, but for its donors. And even if the game of chance is legal, the IRS, and individual state authorities can impose restrictions on the implementation of those activities. Some states even require that a charitable nonprofit have a license to engage in those activities.
What is a Raffle?
The IRS defines a raffle as, “generally… a form of lottery. A raffle generally refers to a method for the distribution of prizes among persons who have paid for a chance to win such prizes, usually determined by the numbers, or symbols, on tickets drawn.
The IRS provides, “Generally, an exempt organization must report raffle prizes if (a) the amount paid reduced, at the exempt organization’s option, by the wager (the amount a person paid for the chance to win a prize), is $600 or more; and (b) the payout is at least 300 times the amount of the wager. The organization uses Form W-2G for this report.”
Here is an example of how that might work:
Wendy purchased a $1 ticket for a raffle conducted by X, an exempt organization. On October 31, 2004, the drawing was held and Wendy won $900. X must file Form W-2G with the IRS and give a copy of Form W-2G to Wendy.
Further, the IRS states that “a person receiving gambling winnings must furnish the exempt organization a statement on Form 5754 made under penalties of perjury stating his or her identity and the identity of any others entitled to the winnings (and their shares of the winnings.)”
All this to say, just because you are a charitable nonprofit and just because it’s a raffle, doesn’t mean you don’t have to pay taxes.
The IRS regulates games of chance, as well as the taxable income earned by the winners. There are a number of issues that arise for charitable nonprofits when engaging in trade promotions:
- The income derived from games of chance might be considered “unrelated business income.” If so, the charity might owe tax on the income, and the winners might owe tax that the nonprofit is required to withhold.
- There is an IRS exception for bingo.
- The IRS imposes reporting requirements and income withholding for raffle prizes.
- Some states (e.g., Pennsylvania) require that proceeds from games of chance must be kept in a special bank account.
- Games of chance might trigger the requirement to conduct criminal background checks on the CEO or other staff of the nonprofit that is hosting the games.
- State or federal law may require the nonprofit to maintain special records and file certain reports about the games/winners.
- Some state employment laws might be triggered when staff members are involved in these trade promotion activities.
- In some cases, the nonprofit could be subject to Gaming Excise taxes.
- A nonprofit hosting an event such as a charity casino night, where alcohol is served, may need a separate alcohol license.
- Depending on how a nonprofit uses the proceeds from its games of chance could open up another can of worms. For example, in North Carolina the law states: “None of the net proceeds of the raffle may be used to pay any person to conduct the raffle, or to rent a building where the tickets are received or sold or the drawing is conducted.”
Can You Deduct the Money you Spent?
A false assumption often made by folks who are successful bidders at an auction or who win at a game of chance, is that the money they spend to win is deductible. They believe that because often the nonprofit advertises that the money goes to a charitable cause. Sometimes they presume that to be true because the event is hosted by a charitable nonprofit.
Often auction donors are very surprised to learn, after the fact, that their donations are NOT deductible.
KNOW the RULES. For more information, check out irs.gov
I’m attorney Francine Ward providing you with information you can use. Your thoughts? Law Twitter Page, Law Facebook Fan Page, Google+, LinkedIn Group.
