Nonprofits: Don’t Gamble on Reporting Gaming Fundraisers

Raffles, Bingo, Pull Tabs, Poker, Casino Nights and More: What You Need to Know

If your nonprofit is considering a raffle or gaming event to raise funds and engage supporters, you’re not alone. Many nonprofits have found these events to be effective.  

As simple as it sounds to execute, the reality is that these fundraising activities are deceptively complex from a compliance standpoint. Those complexities include accurate and transparent reporting on financial statements, income tax filings and payroll tax filings. A thoughtfully executed raffle or casino night can infuse cash into your organization, but rolling the dice on reporting can create issues of compliance, incur penalties and ultimately threaten the trust of your donor base.

Understanding Local Regulations for Raffles

According to the IRS, a raffle qualifies as a lottery because prizes are awarded randomly among paying participants, with no skill required. Regulations aren’t just at the federal level; each state and county may have different rules. Understanding local regulations for raffles is an important first step in ensuring your organization is in compliance.

Registration Requirements

Before you even sell your first raffle ticket, many states require raffles to be registered with local government authorities.  This often involves ensuring your organization meets the local or state criteria, filling out specific forms and possibly paying a registration fee.

For example, if your arts nonprofit is planning a raffle in Georgia, you would first need to apply for a permit from the Sheriff’s office in the specific county where the raffle will be held. In Tennessee, you would file an Annual Event Gaming Application with the Secretary of State, same with Colorado.

This registration process ensures that the raffle is conducted legally and transparently. Failing to register can lead to significant legal complications, including fines and the potential nullification of the raffle itself.

Each state’s requirements can vary significantly, so it’s vital to research and comply with local laws.

State Participation Restrictions

Another layer of complexity involves state-specific restrictions on who can participate in your raffle. Some states only allow residents to buy raffle tickets, especially if the raffle is conducted online. 

These restrictions are designed to prevent issues related to interstate commerce and ensure that all participants are subject to the same legal and tax obligations. Before launching your raffle, check the laws in your state to avoid inadvertently breaking the rules.

Reporting Requirements for Raffles

Properly reporting your raffle activities ensures transparency and compliance with IRS guidelines. This section covers key reporting requirements when organizing a raffle.

Non-Deductibility of Ticket Purchases

One common misconception is that purchasing a raffle ticket is a donation and, therefore, tax-deductible. This is not the case. Raffle tickets are considered as a purchase in which a buyer receives something of value (the chance to win a prize), and therefore do not qualify as charitable contributions. It’s important to communicate this clearly to your donors upfront to avoid any confusion or frustration among your donors.

Form 990 and Schedule G

Nonprofits must report raffle-related revenue and expenses on their annual IRS Form 990. Specifically, if gross receipts from raffles and other gaming activities exceed $15,000, you must complete Schedule G, Part III. This section requires detailed information about your raffle, including gross receipts, prizes awarded, and expenses incurred.

For example, if your organization earns $25,000 from a raffle where the main prize was a $5,000 art piece that your organization purchased, you would need to report these figures on Schedule G because your organization’s income surpassed the $15,000 threshold. 

Further complications can arise if raffles are integrated into larger events without properly segregating the reporting. For example, if you are hosting a fundraising gala that includes a raffle, you must track and report all raffle-related revenue and expenditures separately from the event itself rather than bucketing them together.

Properly tracking and reporting these numbers is crucial to maintain transparency and compliance.

Income Reporting for Winners

Like other winnings from gambling and games of chance, winners of raffle prizes must report the fair market value of their winnings as taxable income on their individual tax returns. This means that if a donor wins a $1,000 prize, they must report that full $1,000 amount as “Other Income.” Failure by the winner to properly report raffle winnings can result in owing back taxes, interest, and potential underpayment penalties to the IRS. 

For the nonprofit, while the above liability falls on the winner, the organization has reporting and withholding responsibilities that facilitate tax compliance. Specifically, nonprofits must report to the IRS any prize valued over $600 on Form W-2G. Withholding requirements for Form W-2G are below.

Clearly communicating the tax requirements to winners is crucial for the organization to remain compliant and avoid unpleasant surprises for raffle participants.

Withholding Requirements

Federal law requires nonprofits to withhold taxes on raffle prizes (cash) exceeding $5,000 at a 25% withholding rate and report to the IRS via Form W-2G.

For non-cash prizes, the winner typically needs to pay the withholding tax (25% of the fair market value) to the organization before claiming their prize. 

For example, if a raffle prize is a sculpture valued at $10,000, the winner would need to pay $2,500 to the organization to collect it. 

Raffle participants may not be aware of these requirements. If they’re taken by surprise at the event, it could be a major source of frustration and discourage them from participating in the future. As such, if you’re awarding prizes worth more than $5,000—especially non-cash prizes—make sure all raffle participants are aware of their tax obligations in advance.

Valuation and Donated Prizes

Accurately valuing and reporting donated prizes is essential for compliance. This process can be confusing if prizes are difficult to value or are donated. 

The value of obvious items, such as a $500 gift card, is straightforward. However, for unique items like a rare painting or a wine collection, establishing fair market value may require an appraisal or comparison with similar sales.

Donated prizes must be reported by the organization as non-cash contributions. This involves determining the fair market value of the donated item and including it in your financial statements and IRS filings. For example, if a local artist donates a painting valued at $2,000, this amount must be reported appropriately.

Unrelated Business Income Tax (UBIT) and Raffles

Unrelated Business Income Tax (UBIT) creates confusion and brings compliance risk to organizations that don’t understand and properly report it. This is particularly important when nonprofits conduct raffles. This section explains how raffle income can be classified as UBI and how to potentially avoid UBIT.

Definition and Criteria for UBI

Raffle income can be classified as Unrelated Business Income (UBI) if it meets each of these three criteria:

1. It is a trade or business.
2. It is regularly carried on.
3. It is not substantially related to the organization’s exempt purpose.

For example, if your nonprofit conducts monthly raffles unrelated to its primary mission, this income could be subject to UBIT.

However, there’s one key exception. If the work is substantially completed by volunteers, the income is generally exempt from UBIT. This means that if your nonprofit holds an annual raffle with significant volunteer involvement, it can avoid paying having to pay UBIT on the proceeds.

To navigate UBIT considerations, it’s wise to consult with an accounting team experienced in nonprofit accounting. They can help you structure your raffle activities to minimize tax liability and ensure compliance.

Smith + Howard: Experienced Nonprofit Accounting Professionals

While raffles can be effective fundraising tools for nonprofits, they come with important reporting and withholding obligations. Reporting of these activities is fact-dependent and the details of your organization’s situation may create additional considerations.

The information above is not all-inclusive and there may be additional tax reporting requirements depending on the type of event or winner(s) involved. As with most tax rules, there are nuances and exceptions to the areas addressed above. We recommend that you consult with an experienced nonprofit tax advisor to ensure proper reporting for the organization and for those who participate in your gaming events.

The nonprofit accounting experts at Smith + Howard can help you navigate these complexities successfully. With proactive planning and expert advice from your advisor, you can avoid legal hurdles and ensure a successful and fulfilling event for all involved.

To learn more about how Smith + Howard can help you stay compliant in your fundraising efforts, contact us today.