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.
- Bingo: traditional bingo game in a jurisdiction where for-profit organizations do not regularly hold bingo events; satellite and internet bingo do not qualify
- 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.
- 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.
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|
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.