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When a Donation Isn’t a Tax-Deductible Donation

Donors who contribute to tax-exempt 501(c)(3) organizations want to believe that all donations are tax deductible. However, if you have a gaming activity such as bingo, split-the-pot, raffles, keno or pull-tabs, the amount donated for such an event is not considered tax deductible by the IRS. Even one raffle at an event is considered a gaming activity.  However only the raffle proceeds from the event are counted as gaming.  Other non-gaming revenues would be reported as regular special event activity.

 

Why this is important

If your organization has regular events where there is gaming activity, then the money raised is considered unrelated business income (UBI). UBI is subject to tax and also requires the Form 990-T. If UBI is excessive, then the tax-exempt status of an organization may be at risk. There is no formal guidance as to how much UBI (gaming and non-gaming) will jeopardize an organization’s exempt status. The IRS makes their determination on a case-by-case basis. However, the gray area that may cause the IRS to look into an entity seems generally to be when the UBI gets to be somewhere in the range of 10 to 15% of total revenue. They also consider the promotion of the activity and compare similar organizations’ use of gaming for fundraising. The best way to avoid the UBI tax is by limiting the number and/or frequency of gaming activities.

 

Form 990 and 990-T

Even if not considered UBI, gaming proceeds have a separate line item on Form 990, with details on Schedule G, based on income threshold. You must also provide Form W-2G to prize winners when the prize exceeds the following thresholds:

–          Bingo or slot machine – winnings not reduced by the wager are $1,200 or more

–          Keno – winnings reduced by the wager are $1,500 or more

–          Poker tournament – winnings reduced by the wager or buy-in are more than $5,000

–          Games except for the above – winnings reduced by the wager are $600 or more and at least 300 times the amount of the wager

 

Bingo is exempt from reporting on the Form 990-T when it meets the following conditions: wagers are placed, winners determined and prizes awarded in the presence of all participants. Additionally, to be exempt from tax, the bingo must not compete with bingo games conducted by for-profit businesses in the same area, and the game must  not violate any state or local laws.

 

Be sure to check with your states attorney general.  Most states have their own definition of gaming, along with rules regulating who may conduct gaming and how many gaming activities may be held annually.

 

Tax-exempt non-charitable organizations, such as 501(c)(7), 501(c)(8), 501(c)10 and 501(c)19 have different rules. If gaming is part of typical social activities for members and guests, then the organization doesn’t have to report earnings on Form 990-T (as UBIT) unless gaming is more than 50% of revenue earned from nonmembers.

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