Gaming: Is it Beneficial For My 501(c)(3) Tax-Exempt Organization?

Author: Jayme Mika, CPA | Not-for-Profit Tax Manager

Gaming, which includes but is not limited to, Bingo, Pull-tabs/Instant Bingo, Keno, Texas Hold-Em Poker, Raffles, Scratch-offs and Casino Nights, could generate significant revenue for tax-exempt organizations to support their tax-exempt  purpose and promote socialization.  Unfortunately, if the process is not monitored and all the facts are not known, gaming can have an impact on the tax-exempt status of 501(c)(3) organizations.

The organization must keep in mind that gaming is not a charitable activity. Gaming typically does not further the exempt purpose of the organization, but it is a recreational activity and a business.  This business mindset opens the activity to the potential for unrelated business income (UBI) tax.  The definition of unrelated business income includes income generated from an activity that is a “regularly carried on trade or business” that is not substantially related to its exempt purpose.  Most organizations skirt the UBI issue because the “regularly carried on trade or business” means that it is conducted with a frequency and continuity similar to comparable activities of a non-exempt organization and pursued in a manner similar to commercial gaming activities.

An important aspect of gaming is the recordkeeping requirements and recommendations. An exempt organization must maintain complete books and records so it meets its reporting responsibilities (gross receipts from gaming, prize payouts, and other related disbursements to substantiate Forms 990 and 990T) and determine any tax liabilities. In general, an organization must maintain records until that statute of limitation expires, generally 3 years.

If the organization's gross revenue from gaming exceeds $15,000, it is required to complete and attach Schedule G, Supplemental Information Regarding Fundraising or Gaming Activities, to the timely filed Form 990 or 990-EZ. Part Ill of Schedule G requires specific information about the organization's gaming activities, such as:

• Gross revenues from bingo, pull-tabs/instant bingo and other types of gaming
• Cash and non-cash prizes paid for each type of gaming
• Rent or costs of facilities
• Other direct expenses
• Percentage of volunteer labor for each type of gaming
• States in which you operated gaming activities and the states in which the organization holds gaming licenses

Because gaming can generate substantial amounts of income, the organization should also have effective oversight controls in place. To ensure that funds are not diverted to private individuals or for private purposes, the organization should maintain active involvement in the conduct of the games themselves.

Additionally the organization may have to report winnings and possibly withholding income tax. If the organization pays the winner or winners of a game in excess of a threshold, it must report the amount and information about the winner(s) to the IRS. The threshold amount at which winnings become reportable depends on the type of game involved.

• Bingo – amount greater than $1,200 and it cannot be reduced by the amount of the wager
• Slot machines – amount greater than $1,200 and it cannot be reduced by the amount of the wager
• Keno – amount greater than $1,500 and it can be reduced by the amount of the wager
• Poker tournaments – amount greater than $5,000.01 and it can be reduced by the amount of the wager
• Other – amount greater than $600 and the payer can decide whether to reduce it by the amount of the wager

Each time the organization pays reportable winnings, it must file a complete W-2G, Certain Gambling Winnings, to report those winnings to the IRS and to the person receiving the winnings. The organization must also withhold income tax from a payment of winnings when the proceeds from the wager are more than $5,000 and the wager was placed in a sweepstakes, wagering pool, lottery, raffle or poker tournament or any other wagering transaction, if such proceeds are at least 300 times the amount wagered.

Even though there are many factors to consider before starting a gaming endeavor, the activities could generate a substantial amount of revenue to help support the organization's tax-exempt purpose. Once the facts and procedures are reviewed and controls put into place, the gaming process could run smoothly, effectively and be very profitable to the organization.

Questions? Contact your Keiter representative or 804.747.0000 | information@keitercpa.com.