Can Nonprofits Use Gaming & Gambling as a Fundraising Activity?
Yes. Many tax-exempt nonprofit 501c3 organizations commonly and successfully use gaming activities to raise funds for their programs. Nonprofit organizations that conduct or sponsor gaming activities such as gambling and raffle games, whether for one night or throughout the year, and whether in their primary place of operations or at a remote location, are subject to federal tax law requirements and must be aware of the rules governing income, employment, and excise taxes.
The term gaming includes activities such as bingo, Beano, raffles, lotteries, “instant” bingo, pull-tabs, scratch-offs, pari-mutuel betting, Calcutta wagering, pickle jars, punchboards, tip boards, tip jars, and certain video games.
Gaming and Unrelated Business Income Tax
Generally, unless an exception applies, unrelated business income tax (UBIT) is paid on receipts derived from gaming. Income from bingo is excluded from the unrelated business income tax by the Code, as is income from lawful gaming conducted in North Dakota.
Lawful gaming ordinarily requires a license from the state in which the gaming is conducted.
Gaming Activities and 501c3 Organizations
Gaming is generally a business activity that does not further section 501c3 purposes. Thus, a section 501c3 organization may conduct gaming only if the gaming is not a substantial part of the organization’s activities and if it provides funds for the organization’s exempt purposes.
Wagering Taxes: There are two taxes relating to wagering. One is an excise tax on certain wagering transactions. The other is an occupational tax on persons who make a business of accepting wagers. A person liable for the excise tax on wagering is automatically liable for the occupational tax on wagering and must register the wagering activity with the IRS.
Definition of Wager: For purposes of the tax, ‘wager’ means any wager with respect to a sports event or a contest, any wager placed in a wagering pool conducted for profit with respect to a sports event or a contest, and any wager placed in lottery conducted for profit.
Conducted for Profit: A wagering pool or lottery is conducted for profit not only if it earns a direct profit but also if it is expected to generate increased sales or attendance, or if the operator takes a percentage of the contributions or charges a fee to join the pool.
Wagering Excise Tax: The taxes on wagering apply to wagers placed in a lottery conducted for profit (i.e., for the purpose of raising funds). Pull-tabs, raffles, and tip jars meet the definition of taxable wagers placed in a lottery. The wagering tax applies to the sum risked by the person placing the bet, not the amount the person stands to win.
Wagers Exempt From Wagering Tax: There is no wagering tax on amounts paid to play a coin-operated device. In addition, there is no wagering tax on wagers placed on the following:
(a) Games When All Are Present
A wager placed in a game in which the wagers are placed, the winners are determined, and the prizes are distributed in the presence of all persons placing wagers in such game is not subject to the wagering tax.
Games of this type involve “group play” and include bingo, keno, card games, dice games, and games involving wheels of chance, such as roulette wheels.
(b) Drawings Conducted By Exempt Organizations
A wager placed in a drawing conducted by a tax-exempt organization is not subject to the tax on wagers, so long as no part of the net proceeds from such drawing inures to the benefit of any private shareholder or individual.
Drawing: A drawing is any physical drawing of a ticket or use of a wheel or similar device by which the winner is conclusively determined by a number, letter, legend, or symbol without reference to outside event that is beyond the control of the operator.
Clarification of the phrase: “Inures to the Benefit of Private Shareholders or Individuals“
The proceeds of a drawing are said to inure to the benefit of private shareholders or individuals when, for example, the expenses of the drawing, including the salary of the operator, are unreasonable. When the drawing is conducted by a membership organization, such as a social club, fraternal society, or veteran’s organization, the proceeds of drawings that are limited to members are not deemed to inure to the private benefit of the members if the proceeds are used for the operation of the club or society. However proceeds, all or part of which come from nonmembers, are deemed to inure to members if used to reduce membership dues or to pay costs that would normally be paid from member dues or assessments. And, proceeds of drawings that are open to the public inure to the benefit of members if such proceeds help to defray the organization’s expenses.
(c) Coin-Operated Device
The wagering tax is not assessed on amounts spent to operate coin- operated devices. Coin-operated devices include slot machines, pinball machines, and machines that display poker hands.
How is This Tax Determined?
The wagering excise tax applies to the gross amount of wagers received. This means that the tax is based on the total amount received before any payout of prizes or other expenses. The tax rate is determined by whether the wager is authorized under the laws of the state in which it is accepted. If the wager is authorized, the rate of tax is 0.25 percent of the amount of the wager. If the wager is not authorized, the tax is 2 percent of the amount of the wager.
Form 730, Monthly Tax on Wagers
The organization reports and pays the wagering excise tax by filing Form 730, Monthly Tax on Wagering. It is due each month by the last day of the month after the month in which the wager was placed. If an organization accepts taxable wagers, it should file a return for each month regardless of whether or not it has taxable wagers to report for that month. If it has none to report, it should write “0” (zero) in the last box of the dollar amount. If it stops accepting wagers, it should check the final return box above Line 1. An organization may be subject to a penalty for failure to file the form and for failure to pay the tax.
Record- Keeping for Wagering Tax
Every person liable for wagering tax must keep a daily record showing the gross amount of all wagers on which a tax is due. Among other things, the daily records must show:
- The gross amount of wagers accepted, and
- The gross amount of each class or type of wager accepted on each separate event, contest, or other wagering
The Internal Revenue Code also imposes an occupational or stamp tax in connection with certain wagers. This tax is an annual fee imposed on both the organization and each of its employees who receive wagers.
The amount of the occupational tax depends on whether the wager is authorized under the laws of the state in which the wager is accepted. If the wager is authorized, the amount of the tax is $50 per year per person. If the wager is not authorized, the amount of the tax is $500 per year per person.
Form 11C, Occupational Tax and Registration Return for Wagering
An organization reports and pays the occupational tax on wagering with Form 11C, Occupational Tax and Registration Return for Wagering. Form 11C must be filed before an organization begins accepting wagers. After that, the organization must file a renewal return by July 1 for each year in which the organization accepts wagers. A Form 11C should also be filed when certain changes in ownership occur, while a supplemental registration return should be filed when certain other changes occur. An organization may be subject to a penalty for failure to file the form and for failure to pay the tax.
Examples of Excise and Occupational Tax Applicability
Example 1: An exempt organization conducts a raffle open to the general public. The organization deposits all of the proceeds into its scholarship fund for local college students from which it awards an annual scholarship in furtherance of exempt purposes. Because the organization does not use any of the raffle’s proceeds for administrative expenses or to benefit a private individual, the raffle does not meet the definition of a taxable wager. Therefore, no wagering taxes apply.
Example 2: An exempt organization sells pull-tabs at its building. The organization uses some proceeds to pay its real estate taxes. The organization has four employees selling pull-tabs. This organization would be liable for the wagering excise tax because it used a portion of the proceeds from its pull-tab sales to pay for its operational expenses. Because the excise tax applies, the organization and its four pull-tab sellers would be required to file the annual occupational tax.
Form W-2G, Certain Gambling Winnings
An exempt organization that conducts gaming must report to the IRS certain gambling winnings and any federal income tax that it is required to withhold on those winnings.
Which Winnings Must an Organization Report?
In general, the organization must report gambling winnings that are $600 or more and that are at least 300 times the amount of the wager. The organization has the option of deducting the cost of the wager from the winnings in determining whether the $600 threshold is met.
Example 1: An organization conducts pull-tab games. Mr. G buys a $2 pull- tab and wins $10,000. Because the amount won is greater than $600 and is 5000 times the amount of the wager, the organization must report Mr. G’s winnings.
Example 2: Mr. S buys a $2 pull-tab and wins $600. You may reduce the amount of the winnings by the cost of the wager, in which case the winnings are $598. You do not have to report the winnings because the $600 threshold is not met.
Keno Games – An organization conducting keno games must report keno game winnings that are $1,500 or more after deducting the cost of the wager.
Example: Ms. E wagers $5 on keno at an exempt organization and wins
$1,500. Because the winnings are less than $1,500 after deducting the cost of the wager, the organization does not have to report the winnings.
Bingo Games and Slot Machines
Exempt 501c3 organizations must report winnings at a bingo game or slot machine that are $1,200 or more before deducting the cost of the wager. An exempt organization reports gambling winnings by filing a Form W-2G for every person to whom it pays the winnings.
Multiple Winners: When the person receiving gambling winnings is not the actual winner or is one of a group of two or more winners, he or she must complete Form 5754, Statement by Person(s) Receiving Gambling Winnings, and give it to the organization. Form 5754 is used to provide information about each winner and each winner’s share of the winnings. An organization then prepares a Form W-2G for each of the persons listed as winners on the Form 5754.
If an organization files on paper, it must file copy A of Form W-2G by February 28 following the calendar year in which it pays the winnings. Use Form 1096 to transmit paper Forms W-2G. If it files electronically, it must file Form W-2G by March 31 following the calendar year in which it pays the winnings. If it is required to file 250 or more Forms W-2G in a year, it must file them electronically.
In addition, an organization must give copies B and C of Form W-2G to the winner by January 31 following the calendar year in which it pays the winnings.
Income Tax Withholding from Gaming Winnings – Regular Withholding
An organization that conducts gaming must withhold income tax from certain gambling winnings. The proceeds of gambling winnings greater than $5,000 are subject to withholding at a rate of 25 percent if won in the following:
- A wager placed in a sweepstake, wagering pool, or lottery, and
- Any other wagering transaction, if the amount of the proceeds is at least 300 times as large as the amount
- The total proceeds from the wager are subject to withholding, not just the amounts in excess of $5,000.
If the winnings are in the form of a non-cash payment, such as a car, the fair market value of the item won is considered the amount of the winnings. An organization must withhold income tax if the fair market value of the item won exceeds $5,000 after deducting the price of the wager. The amount to withhold depends on the organization or the winner pays the withholding tax:
- If the winner pays the withholding tax to the organization, it must withhold 25 percent of the fair market value of the item won minus the amount of the wager,
- If the organization pays the withholding tax, it must withhold 33 percent of the fair market value of the item won minus the amount of the wager.
Exception to Regular Withholding
Generally, organizations do not withhold income tax on winnings from slot machines, keno, or bingo, unless they are required to “backup withhold.” Each person who receives a payment of winnings subject to withholding must provide the organization with a statement on Form W-2G containing:
- His or her name, address, and taxpayer identification number, and
- A declaration that no other person is entitled to any portion of the
Backup Withholding from Gaming Winnings
If an organization is required to report winnings on Form W-2G, the winner is supposed to provide his or her name, address, and taxpayer identification number so that the preparer can properly complete the form. If the winner does not provide this information and if the winnings were not subject to 25 percent regular withholding, the organization must withhold income tax at the backup withholding rate of 28 percent.
Reporting the Withholding on Form 945
The organization is responsible for paying regular or backup withholding, whether or not it collects the withholding from the prize recipient. The best time to collect withholding or backup withholding is before the prize is paid.
An organization reports regular and backup withholding from gaming winnings on Form 945, Annual Return of Withheld Federal Income Tax. Form 945 is an annual return and is due by January 31 of the year after the year in which the taxes were withheld.
Additional Examples of Reporting and Withholding
Example 1: ABC Charity conducts a raffle in which it sells tickets for $25 each. The grand prize is $6,000 in cash. Form W-2G is required because withholding is required for raffle proceeds that exceed $5,000. Withholding on raffle prizes is not affected by the ratio of the prize to the wager. Because the prize less the price of the ticket is $5,975 ($6,000 – $25 = $5,975), the withholding would be $1,494 ($5,975 x 25 percent).
Example 2: Nonprofit Charity conducts a fundraising event in which it sells raffle tickets for $2 each. The prize is a large screen TV with a fair market value of $2,000. Because the prize less the value of the ticket is $600 or more and greater than 300 times the amount of the wager, the organization must complete form W-2G, but does not have to withhold because the prize is less than $5,000.
Example 3: CDN, an exempt organization, has a winner of $5,100 from one of the pull-tabs, which cost $10. Because the winnings, less the wager, exceed
$5,000, Form W-2G is completed and federal income tax is withheld. Income tax withheld is reported on Form 945. The winner would receive $3,827 ($5,100 gross winnings less $1,273 withholding tax) (computed ($5,100 – $10) x 25 percent).
Example 4: CDN, an exempt organization, conducts a weekly bingo game. A payout of $1,300 is made for a single game. The winner furnishes identifying information, along with her SSN, to the organization. The organization must complete Form W-2G because the winnings exceed $1,200. The regular gambling withholding of 25 percent does not apply to bingo.
Example 5: XYZ Charity conducts a raffle in which it sells tickets for $10 each. The grand prize is a snowmobile with a fair market value of $7,000. As explained in the first example, the winnings are subject to regular gambling withholding and Form W-2G is required.
Failure to File Correct Information Returns by the Due Date
If an organization does not file a correct information return (Form 945 Annual Return of Withheld Federal Income Tax) by the due date and cannot show reasonable cause, it may be subject to a penalty. The penalty applies in cases of failure to file timely, failure to include all information required to be shown on a return, or inclusion of incorrect information on the return. The penalty is generally $50 per document unless correction is made within certain time frames.
Failure to Furnish Correct Payee Statements
If an organization fails to provide correct payee statements (Form W2-G Statement for Recipients of Certain Gambling Winnings) and cannot show reasonable cause, it may be subject to a penalty. The penalty applies for failure to provide the statement by January 31, failure to include all information required to be shown on the statement, or failure to include correct information on the statement. The penalty is $50 per statement, regardless of when correct statement is furnished, with a maximum of $100,000 per year.
- Nonprofit Articles of Incorporation,
- Nonprofit Bylaws,
- Nonprofit Conflict of Interest Policy,
- Conflict of Interest Policy Acknowledgment,
- Form 1023 Attachment with all the answers,
- Form 1023 Expedite Letter template,
- and Donor Contribution Form
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