If you’re starting to plan activities for a 2023 fundraiser, consider gaming — for example, bingo, poker, raffles and even casino-type games. Such games can be a great way to engage supporters and raise more revenue than your not-for-profit might otherwise. However, gaming isn’t without potential pitfalls. There are strict tax rules governing these activities, and noncompliance could lead to penalties and other serious consequences.
UBI might be a threat
Income from gaming can create unrelated business income (UBI) tax liability because gaming generally is considered unrelated to a nonprofit’s exempt purpose. Of course, UBI also must be “regularly carried on.” Although gaming conducted only at an annual fundraiser probably won’t produce UBI, 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 isn’t treated as UBI.
Watch for wagering and occupational taxes
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 two taxes don’t apply to 501(c)(3) organizations, whose income can’t benefit such parties.
However, other nonprofits may be liable, regardless of whether the gaming activities qualify for a UBI tax exception. These organizations should check with their tax advisor for guidance, especially if they conduct “pull-tab” or “instant” games — common gaming types subject to the excise taxes.
Reporting and withholding responsibilities
Generally, you must report names of gaming winners to the IRS if you pay out winnings (including raffle prizes) that exceed $600 (after deducting the wager amount) and when they are at least 300 times the amount of the original wager (the buy-in or entry fee). But thresholds vary for certain types of games. For example, for bingo and slot machine gross winnings, the threshold is $1,200 after deducting the wager. For keno, it’s winnings of $1,500 after deducting the wager, and for poker tournaments, it’s $5,000 after deducting the wager.
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.”
Nonprofits also 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. Withholding isn’t required on winnings from bingo, keno or slot machines, nor on poker tournament winnings if you report those on Form W-2G.
Other rules may apply, so be sure to consult a tax expert before finalizing your nonprofit’s gaming plans. In many states and municipalities, you need a license to carry on gaming. Reporting winnings to the IRS is required so make sure your accounting team and financial reports are in order. For help making sure your accounting department is working efficiently and is prepared for year-end, contact the accounting and software experts here.