​Your Nonprofit’s Games of Chance Could be Unlucky

Nonprofits looking for simple, profitable fundraising efforts often turn to games of chance. Raffles, bingos, pull tabs, and other luck-based games are often popular with donors and easy for nonprofits to run.

But like all other fundraising efforts, there are federal and state laws to consider. (Here are details for South Dakota, Nebraska, and Wyoming.) And don’t forget about the federal income tax requirements.

The tax man says …

Nonprofits have to pay income tax on what the IRS calls “unrelated business income” — or UBI for a short, fun, jargony abbreviation.

According to the IRS, UBI is “income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.” So, in non-government terms, the money your nonprofit makes that’s outside the reason your nonprofit exists.

If your nonprofit regularly holds games of chance, that could be considered “regularly carried on.” And odds are (no pun intended), those games are related to your nonprofit’s “exempt purpose.”

But there’s some wiggle room. The money you make from those games could be exempt if they’re conducted with “substantially all” volunteers. The trouble is, the IRS hasn’t bothered to define what exactly “substantially all” means. But their “unofficial guidance” says 85% or more of those running your money-making games should be volunteers. So, you’ll want to make sure your organization is tracking volunteer and staff hours.

Winner, winner, reporting dinner

If the winnings your nonprofit hands out are $600 or more — and at least 300 times the winner’s wager — you have to report them. You can deduct how much the winner wagered to determine if it hits that $600 threshold.

Here’s an example: Let’s say that you’re selling $10 raffle tickets. The Big Winner wins a thousand bucks with one ticket. Since $1,000 minus $10 is $990 and thus more than $600, you have to report it.

If you do have to report those winnings, you’ll need to file Form W-2G by Feb. 28 the year after you make the payment. You’ll also want to give a copy to the winner by Jan. 31 to show how much they won and how much was withheld.

The winner will need to give you their name, address, Social Security number, and a signed W-2G if they’re the only winner. For multiple winners, you’ll need to file a Form 5754.

Don’t forget withholding

If the difference between the wager and winnings is more than $5,000, you’ll need to withhold and remit federal income tax. That tax will need to be 24% of the total proceeds.

Non-cash prizes (e.g., vacation, car, etc.) get a little trickier. If the difference between the fair market value of the prize and the wager is $5,000 or more, the 24% withholding requirement kicks in.

You have a couple of options for withholding when it comes to non-cash prizes. You can have the winner reimburse you. Or you can pay the withholding on behalf of the winner.

If you opt for the section option, that amount is calculated at 31.58% of the fair market value of the prize, minus the wager. You’ll need to report any taxes on the winnings on Form 945 and deposit them as nonpayroll withholding.

If your nonprofit has questions about fundraising efforts and their tax implications, contact us.