Is Charity Gaming Worth the Effort?

Many exempt organizations bet on gaming activities for raising funds, or to allow members to socialize and foster fellowship. The support from the community through these gaming events can be essential for the success of charity initiatives, helping to provide much-needed assistance and resources to those in need.

But any exempt organization that conducts any type of gaming must clearly understand the relationship between the gaming activity and its own exempt purposes to avoid jeopardizing its exempt status or generating unexpected tax liabilities. Whether the organization conducts a gaming activity for one night or throughout the year, it is important to know the federal and state requirements governing these activities, and how these activities can impact exempt status.

What activities are considered gaming? Gaming includes bingo, pull-tabs/instant bingo, Texas Hold-Em poker, most card games, raffles, scratch-offs, break-opens, hard cards, banded tickets, jar tickets, pickle care, Lucky Seven cards, pari-mutuel betting, Nevada Club tickets, fantasy leagues, casino nights, Las Vegas nights, and coin-operated gambling machines. Coin-operated games include slots, electronic video slots or line games, video poker, blackjack, keno, bingo and pull-tabs. Lawful gaming requires adherence to federal law and in many states, state and local laws. In many jurisdictions, licenses are required to conduct gaming activities.

In general terms, gaming does not further the exempt purpose of most organizations and is considered no different than the exempt organization operating a trade or business carried on for profit. There are exclusions and exceptions to the general rule, which usually depend on the section of the Internal Revenue Code governing the organization’s exempt status. Unless an exception applies, unrelated business income tax must be paid on the receipts derived from gaming.

Charities, Churches, Religious Organizations, Hospitals, Schools — 501 (c)(3) organizations

Organizations classified as 501 (c)(3) organizations are operated for a specific charitable purpose and their activities must further that purpose. Gaming is not considered a “charitable” activity. Although the proceeds of the gaming might benefit the organization, gaming does not further any charitable purpose. It is important to remember that gaming cannot be more than an “insubstantial” part of the exempt organization’s activities. The IRS measures “substantial” based on the facts and circumstances of each situation, including dollars raised and spent on the activity as well as the time and resources dedicated to it.  The conclusion here is of paramount importance, as the result could be the loss of exempt status.

Another concept to consider is that of private benefit.  501(c)(3) organizations cannot be organized or operated for the private benefit of any individual or private interest. Gaming activities that result in inurement or private benefit to individuals or private purposes violate the “private inurement” rules.

Social Welfare Organizations – 501(c)(4) organizations

These organizations operate to further the common good and general welfare of the community. Like the 501 (c)(3) organizations, no part of net earnings may benefit private individuals. While gaming is considered both a business and a recreational activity, it does not usually promote social welfare. 

Social Clubs and Fraternal Organizations – 501(c)(7), 501(c)(8), 501(c)(10) organizations

Many of these organizations include social and recreational activities for their members and members’ guests. Gaming may be considered one of these activities, but there are thresholds on gaming activities with nonmembers and exceeding those limits may put the organization’s exempt status in jeopardy and render the income taxable.

Bingo Games and Other Gaming Unrelated Business Income (UBI)

Unrelated Business Income is generated when an organization carries on a trade or business that is not substantially related to its exempt purpose and may be subject to tax. Generally, gaming is considered an unrelated business activity. There are three conditions that must be met for an activity to be an unrelated “trade or business.”

• The activity must be considered a trade or business, i.e., it produces revenue.
• The activity must be carried on regularly, i.e., conducted with some frequency and usually more than on an occasional basis, such as at a special event.
• The activity must be related to the organization’s exempt purpose. 

Let’s assume the gaming activities meet the three requirements above, there are still exceptions to the UBI tax rules that might apply:

• Certain bingo games are excluded.
• The gaming activities are conducted with substantially all volunteers, the unofficial threshold being 85 percent.
• The activity qualifies as public entertainment, much like games at a fair or expo.

Reporting and Paying Taxes

If the gaming activity is determined to be UBI and gross receipts equal or exceed $1,000, a Form 990T must be filed. The organization will normally also file either a 990 or 990EZ and report its gaming activities on Schedule G. It is important to remember that the 990T taxes are subject to the estimated tax rules for reporting and remitting taxes on a quarterly basis.

501(c)(3) organizations may also be subject to an excise tax on wagering and an occupational tax on persons in the business of accepting wagers. In the case of the wagering tax, it’s important to understand the definition of a wager and which wagers may be exempt from this taxation. Most exempt organizations will be exempt from the tax on wagers provided that no part of the net proceeds from the drawing benefit a private shareholder or individual. If applicable, the organization reports and pays the wagering excise tax on Form 730, Monthly Tax on Wagering.  The occupation tax, much like a stamp tax, is an annual fee imposed on organizations and their employees who receive the wagers. Form 11C is used to pay this tax and must be filed before wagers are accepted. 

Taxation on the Gamers

Amounts paid to an exempt organization for any type of gaming are not considered charitable donations. In auction situations, specific rules apply if the wager exceeds the known fair value of the item. Often, the organization will also have annual reporting requirements to the IRS using Form W2G, Certain Gambling Winnings. The threshold at which winnings must be reported depends on the type of game. There may also be regular withholding required on the cash winnings, subject to a 25 percent rate. If the winnings are greater than $5,000, and the wager is in a sweepstake, wagering pool or lottery, or any transaction if the proceeds are at least 300 times as large as the bet made.

Noncash winners are taxed if the fair market value of the prize exceeds $5,000 after deducting the price of the wager:

• If the winner pays the withholding tax, the rate is 25 percent.
• If the organization pays the withholding tax, the rate is 33 percent.

Certain types of winnings are generally exempt from the requirement to withhold income tax.  Organizations must fully understand these reporting requirements before the gaming occurs in order to best manage the information and withholding required after the activity occurs.

Still More Rules to Know

Beyond the tax and reporting rules, there are numerous other considerations to fully understand. Many are dictated by state law rather than federal law. For example:

• Some states require that the proceeds from games of chance be kept in a separate bank account.
  • Some states limit the use of the gross proceeds in some way.
  • In-person gaming might be regulated differently than on-line gaming in a state.
  • Some mobile apps allow ticket sales for games to be purchased through the app, others do not.
  • Some payment processors prohibit using their service for any activity considered gaming. 
  • Most states require some type of license before the gaming activity begins.
  • State regulations are changing all the time. Stay current!

A Few Tips from HBK Nonprofit Solutions

• Understand the federal and state laws and reporting requirements before you get in the game. This is a crucial first step in joining the charity gaming community and ensuring your organization complies with all legal standards.
  • Be ready for increased record keeping for things like volunteer versus employee time spent in the gaming activities.
  • Understand that you might or might not generate a big pocket of cash for your organization. However, engaging in charity gaming isn’t just about fundraising; it’s also an opportunity to play games that bring an opportunity for camaraderie and socialization among members and guests.  By participating, you’re contributing to a greater cause beyond financial gains.

For more details consult the IRS’ Publication 3079, Tax Exempt Organizations and Gaming, or contact HBK Nonprofit Solutions at (732) 453-6528.