Gaming can seem like an appealing and low-cost option for boosting nonprofit revenues. But bingo, poker tournaments, raffles and the like are subject to some strict tax rules and local laws where noncompliance could lead to penalties and even personal liability for board members. Here’s what you need to know:
Unrelated business income
Income from gaming can create unrelated business income (UBI) tax liability because gaming generally is considered unrelated to an organization’s exempt purpose. Of course, UBI also must be “regularly carried on.” So, gaming conducted only at the annual fundraiser probably won’t produce UBI, but a weekly poker game might.
Several other exceptions might also apply. For example, income generated by certain bingo games, gaming run primarily by volunteers, and “qualified public entertainment activities” (activities traditionally conducted by a qualifying organization at a fair or exposition promoting agriculture and education) generally aren’t treated as UBI. Games of chance in North Dakota are excluded also.
If your gaming activity requires a payment for a chance to win, you may need to know about two excise taxes. One is on the amount wagered (the wagering tax) and the other applies to the person or entity in the business of accepting wagers (the occupational tax).
Bingo is never subject to these taxes, and neither is other charitable gaming as long as none of the proceeds benefit private individuals or insiders. This means the taxes don’t apply to 501(c)(3) organizations, whose income can’t benefit such parties.
However, other nonprofits may be liable for the taxes, regardless of whether the gaming activities qualify for a UBI tax exception. These organizations should check with their CPA for guidance, especially if they conduct “pull-tab” or “instant” games, common gaming types subject to the excise taxes.
Reporting and withholding
When must your nonprofit report information about gaming winners to the IRS? Generally, you must report if you pay out winnings (including raffle prizes) that exceed $600 (after deducting the wager amount) and that are at least 300 times the amount of the original wager (the buy-in or entry fee). Thresholds vary for certain types of games, though:
- Bingo and slot machines: Gross winnings, before deducting the wager, of $1,200 or more,
- Keno: Winnings of $1,500 or more after deducting the wager, and
- Poker tournaments: Winnings of more than $5,000 after deducting the wager,
You’ll need to report winnings on IRS Form W-2G, “Certain Gambling Winnings,” and give a copy to the winner. If the payee is part of a group of winners or not the actual winner, he or she must provide you with a completed and signed IRS Form 5754, “Statement by Person(s) Receiving Gambling Winnings.”
You also may have withholding obligations. Nonprofits must collect federal income tax on winnings that exceed $5,000 when the wager was placed in a sweepstakes, pool, lottery, raffle or poker tournament, or any other wager, if the proceeds are at least 300 times the amount wagered.
Withholding isn’t required on winnings from traditional bingo, keno or slot machines, nor on poker tournament winnings if you report those on Form W-2G. But you are required to withhold 24% of gambling winnings (including from bingo, keno, slots and poker tournaments) if the winner doesn’t furnish a correct taxpayer identification number.
In many cases, state reporting is also required. In addition, be sure to determine if you need a state or local license to carry on gaming in your location.
Proceed with caution
Gaming can provide a fun avenue for engaging supporters and fundraising, but it’s not without potential pitfalls. Consider all the ramifications, including state and local laws, before you play your hand.
And, as always, we are here to help! Reach out to the Sechler Morgan CPAs team with your questions here.