Charitable gaming is one of the most common and successful methods of producing income for many tax-exempt organizations. However, careful attention to regulations is imperative. Charitable gaming activities may include, but are not limited to:
o Pari-mutuel betting
o Calcutta wagering
o Pickle jars
o Tip boards
o Tip jars
o Video games.
In order for your gaming fundraiser to be successful without jeopardizing the organization’s funds or, more importantly, their exempt status, all exempt organizations conducting or sponsoring gaming activities, whether for one night out of the year or throughout the year, whether in their primary place of operation or at remote sites, must be aware of all state and federal regulations concerning gaming activities.
Lawful gaming ordinarily requires a gaming license from the state that conducts it. Most states require that an organization be recognized by the IRS as exempt from federal income tax before issuing a license, and many states limit licenses to organizations recognized under specific subsections of Code section 501(c), such as 501(c)(3), 501(c)(4), and 501(c)(19). Additionally, many states make stipulations regarding the length of time an organization must be in operations and/or the specific areas and methods by which gaming sales may be conducted, thus it may be best to consult a professional nonprofit consultant to review the statutes in your area prior to commencing a gaming activity.
As far as the IRS is concerned, for almost all tax-exempt organizations, including 501(c)(3)s, gaming activities do not further an exempt purpose. This is true even if all proceeds from gaming will be used to fund exempt purposes. The result of such ruling is that the revenue generated from gaming is ordinarily subject to unrelated business income taxes. One exception is in North Dakota, where income from lawful gaming is excluded from UBI tax regulations.
An important consideration when conducting charitable gaming activities is the need for diligent recordkeeping. Organizations conducting gaming generate a substantial amount of income at each session, primarily in the form of cash. The cash passes through many hands, which could result in numerous abuses. Thus, every organization should be actively involved in overseeing and controlling each facet of the gaming activity to insure funds are not diverted to private individuals or for private purposes. Organizations conducting gaming activities must maintain records of gross income, prize payouts, and disbursements to substantiate the information submitted on the informational return, Form 990, and the income tax return, Form 990-T. Gross income from gaming activities is determined before any deduction for prizes, taxes, or any other expenses is taken. State and local laws may contain additional recordkeeping and reporting requirements for organizations conducting gaming.
For organizations conducting gaming, it is also imperative that taxes on winnings be retained and submitted to the IRS as well. IRS guidelines establish the levels of prize values that warrant regular withholding. These levels vary for different types of games, so it is important to acquire adequate knowledge of this area to avoid jeopardizing your proceeds. For example, prize of $1,200 or more requires the completion of a Form W-2G by the bingo game operator. The winner of a single prize of $1,200 or more must furnish the bingo game operator with proper identification, along with his/her Social Security Number (SSN). Two types of identification (e.g., driver’s license, social security card, or voter registration card) should be furnished by the winner to verify his or her name, address, and SSN. If the winner does not provide a taxpayer identification number (SSN), the bingo game operator must withhold tax (backup withholding) at the rate of 31 percent. Unfortunately, if an organization fails to retain from the winner and submit to the IRS the taxes required on the winnings it will be deemed their responsibility, and the organization will be forced to pay the winner’s taxes out of their own funding.
For more information on conducting charitable gaming activities in your state, please consult with a professional, your Attorney General’s office, or the IRS.