Gaming Activities Conducted by Tax-Exempt Organizations
Organizations that conduct gaming activities are subject to federal, state and sometimes local tax law requirements. Activities such as bingo, raffles, lotteries, pull-tabs, scratch-offs, casino nights and other games of chance are considered gaming activities by the Internal Revenue Service (“IRS”). Organizations that operate gaming activities are generally required to obtain a license from the state where the organization conducts the gaming activity. If the activity is regularly carried on, it may be subject to unrelated business income tax. In addition, in certain instances, the winnings from gaming activities may be required to be reported as compensation on a federal and state level with any applicable income taxes that are required to be withheld.
Unrelated Business Income (“UBI”)
If a tax-exempt organization regularly carries on a trade or business that is not substantially related to its exempt purpose, income from that trade or business could potentially be considered unrelated business income and subject to unrelated business income tax (“UBIT”), unless an exception applies.
An activity is considered to be an unrelated trade or business if it meets all of the following conditions:
- The activity constitutes a trade or business: The IRS considers gaming to be a business activity and not a charitable activity that furthers an organization’s exempt purpose, even if the net proceeds from the gaming activity are used to fund expenses that further the organization’s exempt purpose;
- The activity is regularly carried on: Gaming will normally not be treated as regularly carried on it if occurs occasionally or sporadically, such as at an annual fundraising event. However, if the gaming activity occurs more frequently such as on a weekly basis, it would likely be considered by the IRS to be regularly carried on; and
- The activity is not substantially related to the organization’s exempt purpose: The IRS typically deems gaming to be an unrelated business activity. However, for certain membership organizations, such as social clubs, gaming may be deemed to further the organization’s exempt purpose, if the income from the activity is generated solely from its members.
- However, even if the gaming activity meets the criteria above to be considered an unrelated trade or business, it will be exempt from the UBIT if it meets one of the following exceptions.
- Certain bingo games, which do not violate state or local law and are played in a jurisdiction where bingo games are not regularly carried on by for-profit organizations;
- Activities conducted with substantially all volunteer labor. Although “substantially all” is not defined in the Internal Revenue Code, generally, at least 85% of the work, measured in hours, is carried on by people who work without being compensated;
- Qualified public entertainment activities, which are activities that are traditionally conducted at a fair or exposition promoting agriculture and education, including any activity whose purpose is designed to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment; or
- Games of change conducted in North Dakota that do not violate any state or local law.
When an organization generates gross unrelated business income of $1,000 or more, it must report the fact that it did so in Part IV of its Form 990, Return of Organization Exemption from Income Tax, and also file a Form 990-T, Exempt Organization Business Income Tax Return, to report the revenue and expenses generated and incurred by the tax-exempt organization. Any net income resulting from the unrelated business activity will be subject to federal income tax at corporate rates. If the amount of unrelated business income tax for the year equals or exceeds $500, the organization is required to pay estimated taxes on a quarterly basis. Organizations that are required to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, or Form 990, and received more than $15,000 in gross gaming revenues must also prepare and file Part III of Schedule G, Supplemental Information Regarding Fundraising or Gaming Activities, which is submitted with Form 990 or Form 990-EZ.
If gaming activities are conducted by paid workers, the organization must determine whether or not the workers are considered to be employees or independent contractors. Wages paid to employees are required to be reported on a Form W-2, Wage, and Tax Statement, and payments to independent contractors are required to be reported on Form 1099-MISC, Miscellaneous Income. In addition, any tips paid to gaming activity workers are also considered wages that are required to be reported on Form W-2.
Recordkeeping
A tax-exempt organization must maintain books and records so that it can meet its reporting responsibilities and determine any applicable tax liabilities. This includes, but is not limited to, items such as cash receipts and cash disbursements journals, general ledgers, accounts receivable and accounts payable journals and source documents. As discussed above, if the organization is required to complete Schedule G, the accounting records should include total gross receipts from gaming, prizes paid out, and other expenses incurred in running the gaming activity. In addition to the financial information, certain non-financial information must also be reported on Schedule G such as the percentage of the organization’s games operated in its own facilities versus outside facilities; the percentage of volunteer labor for each type of gaming activity; states in which the organization operated gaming activities and the states in which the organization holds gaming licenses; and the names and addresses of the gaming manager and the individual responsible for preparing the books and records for the gaming activities.
Internal Controls
Many types of gaming activities can generate large amounts of revenue. Tax-exempt organizations must have internal controls in place to properly ensure the cash collected from gaming activities is not stolen. These controls should include, for example, having enough people working at the event to ensure proper segregation of duties so that no one person controls all aspects of the cash transactions. Some state and local governments have their own laws which require specific recordkeeping and reporting and impose specific internal controls over gaming activities. Make sure to contact the appropriate agencies to determine any state and local laws that may apply.
Reporting Winnings and Withholding Income Tax
Certain winnings paid by a tax-exempt organization, cash or non-cash, are required to be reported on a Form W-2G, Certain Gambling Winnings. The organization may also be required to withhold applicable federal and state income taxes. The reporting and withholding requirements differ depending upon the type of gaming activity and locale.
Unless the winnings are from poker, keno, bingo or slot machines, the winnings must be reported on Form W-2G when the amount paid is $600 or more and at least 300 times the amount of the wager. Winnings from keno must be reported when the payout is $1,500 or more after deducting the amount of the wager. For bingo games and slot machines, winnings must be reported when the payout is $1,200 or more regardless of the amount of the wager. For poker tournaments, winnings need to be reported when the payout is greater than $5,000 after deducting the wager (the entry or buy-in fee).
Each time an organization pays winnings that meet or exceed the reporting thresholds, the organization must complete Form W-2G to report the winnings to the IRS. In order to properly complete this form, the organization should obtain the following information from the winner: name, address and social security number. This information should be verified by reviewing the person’s driver’s license, social security card, or other proper identification.
Federal income taxes must be withheld from cash prizes of $5,000 or more if the gaming activity was a sweepstake, wagering pool, lottery, raffle or poker tournament. For all other wagering transactions, federal income taxes must be withheld if the proceeds are at least 300 times the amount wagered. However, there are some exceptions to this rule. If the winnings are from bingo, keno or slot machines, federal income taxes should not be withheld, no matter how much the person wins. Also, if the winnings are from a poker tournament and are being reported on Form W-2G, there is no requirement to withhold income taxes. For non-cash prizes with a fair market value that meets the withholding requirements, the withholding tax can be paid directly by the winner to the organization conducting the gaming activity. In the event the winner does not pay the withholding tax, the organization must pay the withholding tax on behalf of the winner. If the organization pays the taxes on behalf of the winner, the income reported on Form W-2G should include not only the value of the cash prize but also the amount of the taxes paid on his/her behalf.
When federal income taxes are required to be withheld, in most cases, the IRS requires a 25% withholding. However, in the event the winner refuses to provide the organization with his/her tax identification number, the IRS requires a 28% withholding. If the winner is a nonresident alien, the withholding rate is 30%. In the case of non-cash prizes where the tax-exempt organization is paying the taxes on behalf of the winner, the IRS requires withholding of 33.33%. This rate takes into account not only the tax on the fair market value of the prize won but also the tax on the taxes paid on the winner’s behalf.
Most states also have tax withholding requirements on the winnings.
State Gaming Laws
Most states have their own laws regarding gaming activities conducted by tax-exempt organizations. In the states that allow gaming activities to be conducted by tax-exempt organizations, the organization must obtain a license from the appropriate state or local licensing agency before conducting the gaming activity. Make sure to research the rules in your particular state prior to conducting gaming activities. Failure to follow the rules could result in significant penalties; not to mention negative publicity.
Conclusion
There are many rules and reporting requirements associated with conducting gaming activities. A thorough review and understanding of these rules is highly recommended prior to conducting any gaming activity. Additional information regarding gaming activities can be found in IRS Publication 3079, Tax-Exempt Organizations and Gaming. Click here for a link to Publication 3079. https://www.irs.gov/pub/irs-pdf/p3079.pdf
The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.
How Can We Help?
