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Non-Profit Organizations

New Excise Tax for Private Foundations

By Non-Profit Organizations

In this article, we will provide an overview of the annual minimum distribution requirements and the new excise tax on investment income for private foundations.

Prior to 2019, private foundations had to pay an excise tax of 1 or 2 percent on their net investment income. Now, for tax years starting in 2020, the excise tax is a flat 1.39% of the foundation’s net investment income, with quarterly estimated tax payments still potentially required.  Private foundations who have had more than $1,000,000 of net investment income in any of the three prior tax years, must pay estimated taxes based on their current year tax, using the new 1.39% rate.

Net investment income includes interest, dividends, rents, royalties, and capital gains. It is important to note that if appreciated assets are donated to the foundation and sold by the foundation, the capital gain included in net investment income is the difference between the original donor’s cost basis and the sale price. Expenses directly related to investment income are deductible and reduce the net investment income subject to the tax. For foundations, revenue from contributions is not included in net investment income. In addition to the excise tax calculation, private foundations are required to make qualified charitable-purpose distributions each year. The minimum amount foundations are required to distribute is 5% of the fair market value of their assets that are not used for exempt purposes. Assets taken into account for the calculation of the required minimum distribution generally include cash, marketable securities, and other assets not held for a specific charitable purpose.

The amount required to be distributed is calculated based on the asset values for the current tax year, but foundations have until the end of the following year to distribute the full amount required. Any required distributions not made by then face a 30% excise tax in addition to still having to pay the required distribution amount remaining. On the flip side, if a foundation pays out more than the required distribution amount, the excess will carry forward to be applied against future required minimum distributions.

Qualifying distributions include amounts paid to accomplish the foundation’s charitable purpose, including making grants to other qualifying charitable organizations. Expenses related to investment income are not qualifying distributions.

If you have any questions regarding the distribution requirement or need assistance with excise tax calculations, please do not hesitate to contact your L&B professional at (858) 558-9200.

IRS Updates for Tax Exempt Organizations

By Non-Profit Organizations

Recent legislation resulted in a repeal of the “parking tax” and simplified the excise tax on private foundation net investment income.

The Internal Revenue Service published the following update to inform tax-exempt organizations about recent tax law changes.

The Taxpayer Certainty and Disaster Tax Relief Act, passed on December 20, 2019, includes provisions that may apply to tax-exempt organizations’ current and previous tax years.

Repeal of “parking lot tax” on exempt employers

This legislation retroactively repealed the increase in unrelated business taxable income by amounts paid or incurred for certain fringe benefits for which a deduction is not allowed, most notably qualified transportation fringes such as employer-provided parking. Previously, Congress had enacted this provision as part of the Tax Cuts and Jobs Act, effective for amounts paid or incurred after December 31, 2017.

Tax-exempt organizations that paid unrelated business income tax on expenses for qualified transportation fringe benefits, including employee parking, may claim a refund. To do so, they should file an amended Form 990-T within the time allowed for refunds. More information on this process can be found at IRS.gov.

Tax simplification for private foundations

The legislation reduced the 2% excise tax on net investment income of private foundations to 1.39%. At the same time, the legislation repealed the 1% special rate that applied if the private foundation met certain distribution requirements.

The changes are effective for taxable years beginning after December 20, 2019.

A Hole in One for Professional Sports Organizations

By Non-Profit Organizations

Since 1942, professional sports organizations have been able to elect tax-exempt status as 501(c)(6) nonprofit organizations. Given the profitability of groups like the PGA Tour which reported 1.2 billion dollars in revenue in 2016, the tax savings afforded by Section 501(c)(6) of the Internal Revenue Code, in particular, have been contested. Like most controversial topics, there are two sides to the story.  

When most people think of nonprofit organizations, names like “The American Red Cross” or “UNICEF” usually come to mind. What most people don’t realize is that nonprofit organizations encapsulate several different areas, including professional sports. The PGA Tour and the National Hockey League are examples of organizations that are currently organized as nonprofits. Other professional sports organizations, like Major League Baseball and the National Football League, reorganized as for-profit entities as recently as 2015. The major reason for the reorganizations was due to public scrutiny of their nonprofit status.  Today, regulators have their sights set on the remaining professional sports organizations that continue to operate as nonprofits.  This article will focus on the PGA Tour as it continually operates at a net profit while other organizations often only break-even or report losses.

Although it seems strange that a professional sports organization like the PGA Tour would be classified as a nonprofit, there is an argument to be made in their favor.  The PGA Tour hosts six different tournaments throughout the year and any profit left over after paying all necessary tournament expenses is required to be given to charity. In 2017 alone, the PGA Tour donated 180 million dollars to local charities.  If the organization was not required to donate the leftover money, it would likely be paid out to executives or shareholders.  The tax incentives involved in donating to a nonprofit allow for an abundance of excess profits to be donated back to the community.  It is reported that the PGA Tour has donated over 2.65 billion dollars to charity since its inception.

The most common argument made against the PGA Tour’s exempt status is that it doesn’t pay any federal or state income tax. Interestingly, the Tax Cuts and Jobs Act included a provision in the original Senate bill to eliminate professional sports organizations’ tax exempt status. This provision was eventually dropped due to the coordinated effort from not only the commissioner of the PGA Tour, but golf legends Jack Nicklaus and Davis Love III who met with several Senators in a lobbying effort that ended up costing $500,000. Another argument against the PGA Tour is that only a small portion of the funds contributed to the PGA Tour goes to charitable causes.  This argument was confirmed when a report from “Outside the Lines” outlined that only 16% of tournament funds went to charities. Skeptics argue that promoting the sport and giving to charity can still be accomplished without its current tax-exempt status.

Professional sports organizations will continue to be scrutinized, and although several organizations have willingly restructured, it is unlikely the PGA Tour will follow suit. After failing to pass legislation to be included in the Tax Cuts and Jobs Act, the PRO Sports Act was introduced to the Senate in 2018 to prohibit professional sports organizations from organizing as nonprofit entities. If the bill becomes a law in 2020, it would drastically change how the PGA Tour and other organizations conduct their business. The bill is currently with the Committee on Finance as of February 1st 2020 and has failed to make any significant developments towards becoming a law. If you have any questions regarding the developments of the PRO Sports Act or want additional information on tax-exempt professional sports organizations, please do not hesitate to contact our office at (858) 558-9200.

Even Private Foundations Have Year-End Planning to Do

By Non-Profit Organizations

Do you know if your private foundation made its required charitable distributions this year?  Does it need to make any estimated tax payments?  How are those calculated? 

Private foundations have minimum distribution requirements.  They also pay a tax on net investment income, which can be reduced if the foundation meets certain requirements.  These two calculations are often confused and confusing.  

What does a private foundation have to distribute?

Private foundations are required to make qualified charitable distributions of 5% of the average fair market value of its assets each year.  Qualifying distributions are typically in the form of grants paid to public charities.  Grant administration expenses, as well as a portion of certain dual purpose expenses, such as legal and accounting fees, can also qualify as charitable distributions.

The average fair market value of assets does not include any assets that are used for charitable purposes (such as a building owned by the foundation that is used as an art museum).  Depending on the type of asset, the market values may be determined monthly (such as for marketable securities), annually, or by appraisal, depending on the type of asset.

Since the foundation cannot know for certain what the actual fair market value of its assets is until after the end of the year, the IRS allows for additional time to make these distributions.  At the end of each tax year, the foundation calculates the 5% distribution requirement based on the average fair market values and compares this amount to the actual charitable distributions made during the year.  If the foundation has distributed more than the 5% amount, the excess can be carried forward for up to five years to offset future distribution requirements.  If the foundation has distributed less than the 5% amount, it must distribute the shortfall by the end of the following year.  If it does not, it will face significant penalties for undistributed income.

What is net investment income and how is it taxed?

Investment income includes interest, dividends, capital gains, investment partnership income, and similar items.  Capital losses can reduce capital gains, but not other types of investment income.  Capital losses do not carry forward to a future year.  Expenses such as custodian fees, investment advisory fees, partnership related expenses, foreign taxes paid on dividends, and similar items reduce investment income.  It is the net investment income that a foundation pays excise tax on.

The excise tax rate on net investment income is 2%, but it can be reduced to 1% if the foundation meets certain qualifications.  In order to qualify for this reduced tax rate, the foundation looks at the charitable distributions and average fair market value of assets over the previous five years to calculate an average distribution ratio.

Let’s look at an example:

Year    Qualifying Charitable Distributions   Average FMV of assets          Ratio/Percentage

2018    $1,000,000                                          $10,000,000                            10.00%

2017    $700,000                                             $10,000,000                            7.00%

2016    $500,000                                             $10,000,000                            5.00%

2015    $350,000                                             $7,000,000                              5.00%

2014    $350,000                                             $7,000,000                              5.00%

The average of the five years’ percentages is 6.4%.

In order to qualify for the reduced 1% excise tax on investment income in 2019, the foundation would need to make charitable distributions of 6.4% of the average fair market value of its assets in 2019.  Let’s assume an average fair market value of $10M in 2019. 6.4% of this average is $640,000.  To further complicate matters, the 1% net investment income excise tax is added to this amount.  Assuming net investment income of $1M in 2019, the 1% tax would be $10,000. The foundation would therefore need to distribute $650,000 during 2019 in order to qualify for the 1% tax.

This test for the reduced excise tax is calculated each year.  A foundation either meets the test and pays a 1% tax, or it does not meet the test and instead pays a 2% tax.  Amounts must be actually paid during the year in order to be considered a qualifying distribution.

When and how is the excise tax paid in?

Excise tax payments are due in quarterly estimated tax payment installments, with 25% of the estimated tax due with each payment.  Foundations with more than $1M of net investment income in any of the previous three years must pay in excise tax based on the current year’s net investment income.  Foundations that don’t meet this threshold can use the prior year’s tax as the basis for the current year estimated tax payments.  Tax payments are made through the Electronic Federal Tax Payment System (EFTPS), either online or by phone. This federal payment system requires advance registration.

If you have any questions regarding the distribution requirement or need assistance with excise tax calculations, please do not hesitate to contact your L&B professional at (858) 558-9200.

Revenue Recognition Changes: Standardizing Can be a Good Thing

By Non-Profit Organizations

The new revenue recognition standard for contracts with customers, ASC 606, is now in effect for all nonprofits. Although the updated guidelines apply to all entities and not just nonprofits, this article will largely focus on the effect on different revenue streams for not-for-profit organizations. Read on to see which revenue streams are affected by this new standard.

In an effort to standardize revenue recognition across the different accounting standards boards, ASC 606 has been updated to involve a more principles-based approach rather than the more traditional rules-based approach for recognizing revenue. For this reason, management teams may be required to use more judgement and make more estimates than they have in the past.

What revenue streams are subject to ASC 606?

Nonprofits generate their income from a variety of methods, many of which are considered exchange transactions that are subject to the new standard. An exchange transaction, also known as a contract with a customer, involves the transfer of goods or services to the customer, meaning a sort of reciprocity needs to exist between the organization and the customer. For this reason, most contributions to nonprofits are excluded from the scope of ASC 606. Also excluded are lease contracts, insurance contracts, financial instruments, and guarantees. Listed below are common nonprofit revenue streams that should be evaluated to determine their applicability to ASC 606. If the customer receives a benefit in exchange for their payment to the nonprofit, then the revenue must be recognized according to the five-step model outlined later in the article.

  • Membership dues
  • Subscriptions
  • Tuition
  • Conferences & Seminars
  • Sponsorships
  • Advertising
  • Licensing
  • Program Fees
  • Royalty Agreements
  • Federal and State Grants and Contracts

Some contracts involve both a contribution and an exchange portion, the latter of which often requires judgment to determine the amount. For example, if a nonprofit that has annual member dues of $100 also sends members a monthly magazine that has an annual value of $40, the organization can only consider $60 as a contribution. The remaining $40, the value of the magazine, is considered a benefit to the member and therefore an exchange transaction that would be accounted for under ASC 606.

There is a five-step model in determining which contracts apply under Topic 606. Each separate revenue stream that has an exchange transaction should be evaluated using this model in order to determine the amount and timing of revenue recognition.

  1. Identify the contract with a customer.
  2. Identify performance obligations, which are promises by a vendor to transfer goods or services to the customer.
  3. Determine the transaction price of the entire contract.
  4. Allocate the transaction price to the performance obligations identified in step 2.
  5. Recognize revenue when or as the entity satisfies the performance obligations.

Application of the five-step model results in revenue recognition when control over goods or services is transferred to the customer and the amount recognized is based on consideration provided for under the contract. Keep in mind that nonreciprocal transactions should follow the normal contribution guidance, whereas reciprocal transactions fall under Topic 606.

We know that it can be difficult to change your nonprofit’s revenue recognition methods and to determine what actually qualifies as an exchange transaction under the new standard. If you have any questions or need additional guidance, please do not hesitate to contact our office at (858) 558-9200.

Donation-Based Crowdfunding

By Non-Profit Organizations

Have you ever made donations to a charity online? Did you use a crowdfunding website, such as GoFundMe? If you have, there’s a chance that you may be unable to deduct those donations on your tax return. Read on to discover if your charitable donations are actually tax-deductible, as well as if crowdfunding could be a viable fundraising option for your nonprofit organization.

What is Crowdfunding?

Crowdfunding is a method of raising money for a project by collecting small amounts of contributions from a large number of contributors. One of the most common types of crowdfunding is donation-based crowdfunding, in which contributors help raise funds for a social or charitable cause. In this situation, contributors may not necessarily be donating to a nonprofit organization, but may instead be donating to a specific cause, like helping to pay the medical bills of someone who cannot afford them. The main place one might encounter donation-based crowdfunding campaigns is through social media, community websites, and websites designed specifically to support crowdfunding efforts. Crowdfunding is, in many ways, a combination of social media outreach and traditional fundraising.

Can Crowdfunding Donations Be Tax-Deductible?

The most popular crowdfunding website for social fundraising is GoFundMe.com. This website is a donation-based fundraising platform that allows users to form a campaign and describe to potential donors the cause for which they are raising money. Generally, donations made to a campaign on a platform such as GoFundMe are considered to be “personal gifts” and are not tax-deductible. However, if the donation is made to a “GoFundMe Certified Charity Fundraiser,” it would be considered tax-deductible. This can be determined by looking for a “certified charity badge” listed on the campaign page. Tax-deductible donations will automatically receive a receipt from the PayPal Giving Fund, which is a non-profit partner of GoFundMe that collects donations and distributes them to the designated charities. There are other similar websites, such as Fundly.com, DonateKindly.org, DoubletheDonation.com, and several more.

Advantages of Crowdfunding for Nonprofit Organizations

If you are a part of a 501(c)(3) tax-exempt organization, you might want to consider using donation-based crowdfunding as a way to raise funds for your charity. A few advantages of using crowdfunding for your organization are:

  • There are no long wait periods to receive donated funds
  • Some crowdfunding websites don’t charge fees
  • It may be easier to reach people outside of your usual network
  • You can leverage small donations from a large amount of people
  • It builds transparency within the organization as people can see where the donations are coming from
  • It allows you to speak directly with those that have donated, which can help cultivate a larger community and stronger relationships

Disadvantages of Crowdfunding for Nonprofit Organizations

While there are quite a few advantages of donation-based crowdfunding, this type of fundraising might not be the right avenue for your organization for a few reasons:

  • Some crowdfunding platforms take a percentage of donations for themselves
  • It still requires some marketing strategy – it is worth considering whether or not the benefits outweigh the costs
  • Crowdfunding has become much more popular in recent years, amplifying the competition for funds
  • It can be difficult for many campaigns to meet their goal – less than 1/3 are successful. Some websites, such as GoFundMe, enforce fundraising minimums, and if the campaign does not reach that minimum, none of the funds will be received. Others, like Fundly, have no required minimums.

If you have recently donated money on a crowdfunding website, or are considering donating, make sure to check for the “certified charity badge” on the donation page, and save any receipts that prove the donation was tax-deductible. Crowdfunding websites provide an easy and affordable option of fundraising for nonprofits, while reaching a wide range of potential donors. If you have any questions about tax-deductible crowdfunding donations, or whether crowdfunding is right for your organization, please do not hesitate to contact our office at (858) 558-9200.

Transportation Fringe Benefits May Not Drive Up Your UBIT

By Non-Profit Organizations

When the Tax Cuts and Jobs Act originally added the nonprofit transportation (primarily parking) tax, most entities were worried that they would be subject to additional taxes. However, new guidance was issued in December of 2018 clarifying the tax and how to determine the amount that would be included in unrelated business taxable income. As a result, fewer nonprofits may be subject to the tax than originally thought.

Under the new tax law, tax-exempt organizations are required to increase their unrelated business taxable income (UBTI) by the amount they pay for qualified transportation fringe benefits, or QTFs, provided to employees. Organizations with UBTI greater than $1,000 are required to pay taxes on that amount by filing Form 990-T. The current federal tax rate on UBTI is 21%. The California rate is 8.84%. It should be noted that nonprofits that keep their UBTI under the $1,000 threshold do not have to pay any tax on QTFs, so it may be in the organization’s best interest to adjust their parking arrangements.

What is a Qualified Transportation Fringe Benefit?

QTFs aren’t just employer-provided parking benefits; they also include the provision of any mass transit pass or bicycle commuting reimbursements by the employer to an employee. UBTI is increased when the nonprofit pays for any QTF benefits directly, through a third-party, or if the organization allows employees to pay for the benefits themselves on a pre-tax basis. The good news, though, is that QTFs aren’t considered a separate trade or business. Nonprofits are able to combine their increase in UBTI due to parking expenses with an existing unrelated trade or business, meaning organizations with a net loss from their one unrelated trade or business can offset their UBTI from QTFs.

Calculating Parking Expenses Subject to UBTI

When nonprofits pay a third party for employee parking, the total annual cost is automatically considered a parking expense subject to tax. Due to monthly limitations on employer-provided benefits, parking expenditures greater than $265 per employee during 2019 (versus $260 in 2018) are not included in UBTI because those excess amounts should be included in employee wages. For example, if the organization pays $275 per month for employee parking, $265 is excluded from employee wages, and the remaining $10 is recognized by the employee as compensation income each month. UBTI would be increased by the $265 monthly expense only; there is no increase to UBTI for the remaining $10.

Nonprofits that own or lease their own parking facility must calculate their parking expenses that are subject to UBTI using a different method. The December 2018 Notice has provided a four-step process for determining parking expenses for nonprofits that own or lease their own parking facility. Although the calculation can be complicated, in general, organizations should be tracking the number of reserved employee spots in relation to total parking spots. The percentage of parking expenses related to reserved employee spots is included in the UBTI calculation, and the remaining parking expenses are not included in UBTI.

Moving forward, tax-exempt organizations should reevaluate their parking arrangements to avoid or reduce the increase to UBTI related to reserved employee parking spots. If you have any questions regarding the above, or would like some guidance on how best to reduce your nonprofit’s unrelated business taxable income, please do not hesitate to contact our office at (858) 558-9200.

An Executive Director and a Lobbyist Walk Into a Bar…

By Non-Profit Organizations

Can a nonprofit organization get political? Could penalties be involved?  Could the organization’s exempt status be at risk?  It may be surprising to learn that some nonprofits may be able to engage in legislative lobbying activities.

The main caveat to an organization’s ability to participate in lobbying activities is that those activities must constitute an insubstantial portion of that organization’s total activities. But what does insubstantial mean? Neither Congress nor the IRS has provided a concrete definition of what constitutes “substantial”, which could make lobbying risky.

If your organization is struggling to determine if its lobbying activities are substantial, the Section 501(h) election may be a solution worth considering.

What is a 501(h) Election?

The 501(h) election provides clarity to this gray area by establishing dollar limitations on lobbying expenditures.  Section 501(h) allows nonprofit organizations to elect “safe harbor” dollar limitations on lobbying expenditures in place of the more subjective limits to determine substantiality.

What are lobbying expenditures?

Lobbying expenditures, as defined by federal tax law, are “expenditures for the purpose of influencing legislation.”  Legislation refers to any action by Congress, state legislature, local council, or similar body on a bill, draft bill, referendum ballot initiative, constitutional amendment or similar procedure. Section 501(c)(3) of the tax code states that no substantial part of the activities of the organization may constitute “carrying on propaganda, or otherwise attempting, to influence legislation.”

What are the benefits of making the election? What are the risks?

Because the 501(h) election is a safe harbor based on expenditures with a set dollar limitation, other factors, such as volunteer labor, are not considered when evaluating the level of lobbying activities that an organization engages in. The major risk of making a 501(h) election is spending more than the “lobbying ceiling amount.” The consequence of overspending in any one year is an excise tax of 25% of the excess expenditures. If the organization exceeds its limits for four consecutive years, they risk losing their tax-exempt status, which would cause all income for that period to be subject to tax.

Who can make the election (and who can’t)?

In general, public charities are able to make the 501(h) Election.  However, private foundations, churches, and supporting organizations that support noncharitable organizations exempt under 501(c)(4), (c)(5), and (c)(6) are not able make the election.

What about political campaign activity?

A 501(c)(3) organization cannot participate in any political campaign on behalf of or in opposition to any candidate for public office.  Engaging in this type of activity will result in a loss of tax-exempt status. This differs from lobbying activities in that it takes a direct role in supporting/opposing a specific political candidate rather than merely attempting to influence political outcomes.

To learn more about the 501(h) election and its limitations, or to better understand if it may be a good option for your organization, please do not hesitate to contact our office at (858) 558-9200.

Highlights from the State of Nonprofits & Philanthropy in San Diego Report

By Non-Profit Organizations

The Nonprofit Institute at the University of San Diego publishes an annual report analyzing the economic health of the NPO sector and its impact on our community.  Did you know that there are 11,234 registered 501(c)(3) public charities in San Diego County?  Read on for more surprising facts about the sector.

The Nonprofit Institute at the University of San Diego published its annual report on the state of the nonprofit sector in San Diego.  The report highlights the role of the NPO sector in our community.  The research team pulls data from a variety of sources and provides interesting insights.  Click here to access the full report.

Of the 11,234 registered public charities, 2,550 of them employed staff, with just over 115,000 paid employees.  The largest number of organizations is in the Human Services (32%) and Education/Other (18.5%) sectors.

In terms of assets, there were approximately $29.7B of assets in local charitable organizations.  Of that amount, $2.6B of assets were held by over 700 private foundations.  In looking at the breakdown of assets by sector, the Hospitals and Health sector, which represents 10.4% of the organizations had 57.5% of the total assets.  This sector is particularly strong in San Diego County, where Sharp, Scripps, Rady’s Children’s Hospital all have a large presence.

The report found that 37% of San Diego area households volunteered with local nonprofits and 50% of households made monetary donations to nonprofits.  The impact of the Tax Cut and Jobs Act of 2018 on charitable giving has yet to be determined and it is unclear whether the larger standard deduction will reduce donations.

In terms of public confidence and leadership, nonprofit organizations received the highest rating, ahead of for profit organizations and federal, state or local governments.

With so many organizations in our community, it can be difficult to evaluate where to commit your charitable dollars or spend your volunteer hours.  An organization’s Form 990 provides valuable information on the type of programs it conducts and how it spends its funds.  The board members are shown, along with details on compensation and fundraising activities.  If you are interested in learning more about how to read the 990 or evaluate its contents, please feel free to contact your L&B professional at 858-558-9200.

Game Night: Raffles and Other Fundraising Activities

By Non-Profit Organizations

Fundraising activities are a great way for nonprofits to obtain funds to be used for their charitable purpose. Everybody loves bingo night or winning an all-expense-paid vacation through a raffle, especially when their donations to participate are for a good cause. However, some of the rules and regulations relating to these types of fundraising activities can be a bit tricky to navigate. Check out this article before holding your next fundraising activity for some helpful information.

General Fundraising Information:

Fundraising itself is not considered a charitable activity, even if you use all of the proceeds for a charitable purpose. Thus, income from any fundraising activity is subject to the rules regarding Unrelated Business Income (“UBI”). Keep in mind that UBI greater than $1,000 is taxable for activities that occur during the regular course of business. Under the new tax law, UBI is taxed at either the corporate rate or at trust rates, depending on how the entity is structured. However, if the event only occurs occasionally, it’s nontaxable; meaning all those annual fundraisers are tax-free. To refresh your memory on other UBIT changes under TCJA click here.

Even if an event would normally qualify as UBI, it’s excluded from UBI, and therefore nontaxable, if it meets any of the following criteria.

  1. Bingo: traditional bingo game in a jurisdiction where for-profit organizations do not regularly hold bingo events; satellite and internet bingo do not qualify
  2. Volunteer Labor: substantially all of the work is conducted by volunteers without compensation. Compensation includes everything from free items, like food or drinks, to tips received while working.
  3. Silent Auctions: proceeds from the sale of items that were received as a gift or donation

Regardless of whether or not the fundraiser qualifies for UBI, nonprofits should keep detailed records of the event in order to avoid risking their tax-exempt status.

Reporting Requirements:

The reporting requirements for fundraising activities depend on both the type of activity being performed by the nonprofit as well as the amount of winnings. In general, nonprofits are expected to disclose the identity and earnings of any winner of a wagering transaction who receives $600 or more that is at least 300 times their wager. For example, if John buys a $1 raffle ticket and wins $600, his winnings are greater than 300 times his wager of $1. However, the nonprofit does not need to report the winnings because the net winnings are only $599, so the $600 threshold is not met. For bingo, slot machines, keno, or poker tournaments, the minimum earnings to report differ from the $600. The following table summarizes the thresholds for some of the most commonly performed fundraisers.

Type of Game Winnings Amount
Wagering Transactions (raffles, pull-tabs, etc) $600 and at least 300 times the wager
Bingo $1,200
Slot Machines $1,200
Keno $1,500
Poker Tournaments $5,000

 

What about Tax Withholdings?

Nonprofits must withhold income tax from winnings over $5,000 at a rate of 24% for both cash and noncash prizes based on fair market value. The tax is calculated based on total winnings, reduced by the amount of the initial wager, and is reported on Form W-2G. Backup withholdings of 24% may be required for fundraising other than wagering transactions that meet the reporting requirements listed above. If the nonprofit doesn’t withhold taxes from the prizes, they may be liable for the tax at a higher rate of 31.58% and would be required to report gross winnings plus the tax paid on behalf of the winner.

Specific Regulations for Raffles:

Although federal laws are uniform, each state has different rules and reporting requirements for raffles; it is always best to check state regulations before conducting a raffle. Almost all states require nonprofit status and a permit filed with the appropriate jurisdiction to be eligible to conduct a raffle. In California, nonprofits must register with the Attorney General to get a raffle permit number. They cannot advertise or sell tickets online. Nonprofits who hold raffles are also subject to the 90/10 rule, meaning 90% of the gross receipts from the sale of raffle tickets must be used for charitable purposes, either by the nonprofit itself or by another eligible organization. The proceeds also must be used in California, and the organization must file a single aggregate report to disclose revenues after all raffles have been completed for the year.

We know that it can be difficult to keep all the reporting requirements straight when it comes to fundraising activities. If you have any questions about the tax treatment of your next fundraiser, please do not hesitate to contact your L&B professional at (858) 558-9200.

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