Raffles are becoming a popular way for private schools and other tax-exempt organizations to raise funds.
There are potential pitfalls to be aware of, so before holding your first raffle, or even if you’ve already had a raffle or two, consider the following questions and answers.
If the funds raised from a raffle are used to further the organization’s charitable purpose, is the raffle a charitable activity?
No, it is not. Private schools are 501(c)(3) organizations and, therefore, their activities must further their charitable purpose – education. Gaming activities, including raffles, are not furthering that purpose, even when the funds are used for education.
Will the income raised by the raffle be taxable?
The income may be taxable as unrelated business income (UBI) if the activity generating the income is considered a trade or business, is regularly carried on and is not substantially related to the organization’s exempt purpose. As discussed above, raffles are not related to a school’s exempt purpose.
Raffles, and gaming in general, are considered to be a trade or business. The frequency of the raffles will likely determine whether or not they are an unrelated business activity. The occasional fundraising raffle, as compared to a weekly raffle, will not give rise to UBI.
Using volunteers to work at the fundraising event is also a way to prevent UBI treatment of income received, as long as the volunteers represent substantially all the labor used in holding the raffle.
Are there special filing and reporting requirements if a raffle is held?
There are several filing requirements to consider when holding a raffle. If raffles are held regularly and generate gross unrelated business income of $1,000 or more, a Form 990-T must be filed to report the income.
Even if raffles are not regularly held but generate more than $15,000 of gross income, Schedule G must be prepared and attached to Form 990 or 990-EZ. Winnings may also need to be reported to the IRS. If the raffle prize is valued at $600 or more and is at least 300 times the price of the raffle ticket, the winning amount must be reported on Form W-2G to the IRS and to the raffle winner.
Income tax withholding is required on winnings greater than $5,000 and must also be reported on Form W-2G. The withholding requirement applies to both cash and non-cash prizes.
Withholding on non-cash prizes is based on the fair market value of the item and can either be paid by the organization (thus increasing the raffle prize and withholding required) or the raffle winner can pay the withholding to the organization. Backup withholding may also be an issue when a winner does not provide his or her tax identification number.
Overall, raffles can be an exciting and successful addition to an organization’s fundraising plans, as long as proper procedures are in place to avoid unforeseen tax and reporting issues.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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