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  Tax Exemption Home: Non Profit / Exemption Information: Exemption Workshop - Chapter 5 - Gaming

Exemption Workshop - Chapter 5 - Gaming

Gaming as a Fundraising Activity  

Many tax-exempt organizations normally hold   successful gaming activities as a scheme to raise funds for their programs. A fundraising is defined as the organized activity of raising funds, whether by volunteers, employees, or paid independent contractors. The organizations that conduct or sponsor gaming activities, be it in their primary place of operations or at an outside location, are subject to federal tax law requirements regardless of the frequency of the gaming activity and must be aware of the rules governing income, employment, and excise taxes.

The term gaming refers to  activities such as bingo, Beano, raffles, lotteries , punch boards, tip boards, tip jars,  “instant” bingo, pull-tabs, scratch-offs, pari-mutuel betting, Calcutta wagering, pickle jars, punchboards, tip boards, tip jars,  certain video games, 21, keno, split-the-pot, and other games of chance. Gaming activities continue to flourish with innovative schemes but continue to be governed by federal tax laws whenever applicable.

Gaming and Unrelated Business Income Tax   

Ordinarily, unless an exception is provided by law, unrelated business income tax (UBIT) is paid on receipts derived from gaming. However, income from bingo is exempted from the unrelated business income tax by the Code (see Chapter 4), so with income from lawful gaming held in North Dakota.
Lawful gaming normally requires a permit from the state that has jurisdiction over the gaming being conducted. Any gaming conducted without a license from the concerned state is considered unlawful and are taxed with a higher tax rate.

Gaming Activities and 501(c)(3) Organizations     

Gaming is generally a business undertaking that is not necessary to further section 501(c)(3) purposes. Thus, a section 501(c)(3) entity may conduct gaming only if it does  not represent a substantial part of the organization’s activities and if it provides funds for the organization’s tax-exempt objectives.

 Wagering Taxes   There are two taxes involved in wagering. One is an excise tax on certain betting transactions. The other is an occupational tax on persons who are engaged in the business of accepting wagers. A person liable for the excise tax on betting is automatically liable for the occupational tax on wagering and must register the wagering business with the IRS.

Definition of Wager        

For purposes of the tax, ‘wager’ means any wager  placed for a sports event or a contest, in a wagering pool conducted for profit with respect to a sports event or a contest, and  in a lottery conducted for profit.

Conducted for Profit: A wagering pool or lottery is deemed conducted for profit not only when a direct profit is earned from it but also if it is estimated to boost sales or increase attendance, or if the operator collects  a certain percentage of the contributions or charges a fee for persons to qualify them to join the pool.

Wagering Excise Tax           

The taxes on wagering apply to bets placed in a lottery conducted for profit (i.e.,it is a fund- raising drive). Pull-tabs, raffles, and tip jars conform to the definition of taxable wagers placed in a lottery.

The wagering tax applies to the amount risked by the person placing the bet, not the amount the person stands to earn.

Wagers Exempt From Wagering Tax      

There is no wagering tax on sums paid to play a coin-operated device. In addition, there is no wagering tax on bets placed on the following:
(a) Games When All Wagers Are Present

When a wager  is placed in a game in which the bets are placed, the winners are determined and the prizes are awarded in the presence of all persons placing wagers in such game , then the is not subject to the wagering tax.

Gaming activities of this type involve “group effort” and include bingo, keno, card games, dice games, and games wherein wheels of chance are used, such as roulette wheels. 

(b) Drawings Conducted By Tax-Exempt Organizations

A wager placed in a lottery conducted by a tax-exempt organization is not subject to the tax on wagers, for as long as no part of the net proceeds from such drawing personally benefits any private shareholder or individual in the said organization.
Drawing: A drawing is any physical drawing of a ticket or use of a wheel or similar device by which a certain number, letter, legend, or symbol is drawn as winner with finality  without reference to external  event that is beyond the control of the operator.

Inures to the Benefit of Private Shareholders or Individuals: The doctrine of inurement prohibits a tax-exempt organization from engaging in any activities which will permit any of the organization’s income or assets to unduly benefit a person who has some close relationship to the organization (i.e…an insider). In the case of gaming, the doctrine of inurement is further refined to mean that the
proceeds of a drawing are said to inure or redound to the benefit of private shareholders or individuals when, for example, the expenses of the drawing, including the fee of the operator, are deemed unreasonable. When the drawing is conducted by a membership organization, such as a social club, fraternal society, or veteran’s organization, the proceeds of drawings that are limited to members do not redound to the private benefit of the members if the proceeds are used for the operation of the club or society. However proceeds, all or part of which come from nonmembers, are deemed to personally benefit the members if offset to reduce membership dues or to defray costs that would normally be paid from membership dues or assessments. And, proceeds of drawings that are open to the public redound to the benefit of members if such proceeds are used to pay in part some of the organization’s expenses.

(c) Coin-Operated Device

The wagering tax is not collected on sums spent to operate coin-operated devices. Coin-operated devices include slot machines, pinball machines, and machines that display poker hands.

How is This Tax Determined?     

The wagering excise tax applies to the gross amount of bets received before any awarding of prizes or other expenses incurred. The tax rate is determined by whether the wager is authorized under the laws of the state in which it is accepted. If the wager is lawfully authorized, the rate of tax is 0.25 percent of the amount of the wager. If the wager is not authorized, the tax is 2 percent of the amount of the wager.

Form 730, Monthly Tax on Wagers

The organization reports and pays the wagering excise tax by filing Form 730, Monthly Tax on Wagering. It is due each month by the last day of the following month after the month in which the wager was placed. If an organization is not restricted to accept taxable wagers, it should not fail to file a return for each month. If there is none to report, it should write “0” (zero) in the last box of the dollar amount. If it stops accepting wagers, it should check the final return box above Line 1. An organization may be subject to a penalty for failure to file the form and for failure to pay the tax.

A credit or refund may be claimed for an overpayment of the wagering tax based on the conditions set for such claims.

Record- Keeping for Wagering Tax Every person liable for wagering tax must keep a daily record showing the gross amount of all wagers accepted on which a tax is due. Among other things, the daily records must show:

The gross amount of wagers accepted on each event, contest or other wagering medium and the gross amount of any wagers lay off with other persons and the name, address, and registration number of each person with whom the organization placed the laid-off wagers.

Occupational Tax                

The Code also levies an occupational or stamp tax in connection with certain wagers. This tax is an annual fee imposed on both the organization and each of its employees who receive wagers.

If all wagers accepted are authorized under the laws of the state in which accepted, the amount of the tax is $50 per year per person. If the wager is not authorized, the amount of the tax is $500 per person per year.

Form 11C, Occupational Tax and Registration Return for Wagering         
An organization files a report and pays the occupational tax on wagering with Form 11C, Occupational Tax and Registration Return for Wagering. Form 11C must be filed before an organization can begin accepting wagers. Subsequently, the organization must file a renewal return by July 1 for each year wherein the organization accepts wagers. A Form 11C should also be filed when certain modifications in ownership occur, while a supplemental registration return should be filed when certain events occur. An organization may be penalized for failure to file the required forms and for failure to pay the tax
Examples of Excise and Occupational Tax Applicability  

Example: A tax-exempt organization holds a raffle open to the general public. The organization deposits all of the collected amount into its scholarship fund for local college students. The annual scholarship granted to students come from said scholarship fund in.furtherance of exempt purposes. Since the organization does not set aside any of the raffle’s proceeds for administrative expenses or to benefit a private individual, the raffle does not fall under the definition of a taxable wager.  No wagering taxes, therefore, apply.

Example: An exempt organization sells pull-tabs at its premises. The organization sets aside some amounts from the proceeds to pay its real estate taxes. The organization has assigned four employees in selling pull-tabs. In this case, it is clear that the organization would be liable to pay the wagering excise tax because a portion of the proceeds from its pull-tab sales is being paid for its real estate taxes which fall under the classification of operational expenses.  It is also clear that the organization and all of the four pull-tab sellers would be required to file the annual occupational tax.

Form W-2G, Certain Gambling Winnings  

A tax-exempt organization that is engaged in gaming activities is required to report to the IRS certain gambling winnings and any federal income tax that it is required to withhold on those winnings.

Which Winnings Must an Organization Report?   

In normal practice, an exempt organization must report gambling winnings that are $600 or more and that are at least 300 times the amount of the wager. The organization has the option of deducting the cost of the wager from the winnings in determining whether the $600 threshold is met.

Example: An organization conducts pull-tab games. Mr. G buys a $2 pull-tab and was awarded a winning of $10,000. The amount won appears to be bigger than $600 and is 5000 times the amount of the wager, so the organization must report Mr. G’s winnings.
Example: Mr. S buys a $2 pull-tab and wins $600. The organization may reduce the amount of the winnings by the cost of the wager, in which case the winnings are $598. Since the winnings fall below the threshold of $600. there is no need to report the winnings of Mr. G.

Keno Games         

An organization in required to report keno game winnings that are $1,500 or more after deducting the cost of the wager.

Example: Ms. E bets $5 on keno at an exempt organization and subsequently wins $1,500. Because the winnings are less than $1,500 after deducting the cost of the wager, the organization is not required to report the winnings.

Bingo Games and Slot Machines   

Exempt organizations are required to  report winnings in a bingo game or in a slot machine that are $1,200 or more before deducting the cost of the wager.
When to File Form W-2G   An exempt organization files Form W-2G to report gambling winnings for every person to whom it pays the  income from gambling.
Multiple Winners: When the person receiving gambling winnings is only representing the actual winner or is one of a group of two or more winners, he or she must complete Form 5754, Statement by Person(s) Receiving Gambling Winnings, and submit it to the organization. Form 5754 details out information about each winner and each winner’s share of the winnings. The organization then prepares a Form W-2G for each of the persons listed as winners on the Form 5754.

If an organization files a hard copy, it must file copy A of Form W-2G by February 28 following the calendar year in which it pays the winnings and Use Form 1096 to transmit it.  If the organization files electronically, it must file Form W-2G by March 31 following the calendar year in which it paid the winnings. If it is going to file 250 or more Forms W-2G in a year, the organization is required to  file them electronically. In addition, an organization must give copies B and C of Form W-2G to the winner by January 31 following the calendar year in which it pays the winnings.

Income Tax Withholding from Gaming Winnings - Regular Withholding   An organization that conducts a gaming activity must withhold income tax from certain gambling winnings. The proceeds of gambling winnings over  $5,000 are subject to withholding tax at a rate of 25 percent if won in the following:
A wager placed in a sweepstakes, wagering pool, or lottery, and
Any other wagering transaction, if the amount of the proceeds is at least 300 times as large as the amount of the bet.

If the winnings are in kind rather than in cash, such as a car, the fair market value of the prize won is deemed the amount of the winnings. An organization must withhold income tax if the fair market value of the item won exceeds $5,000 after deducting the amount of the wager. The amount to withhold depends on whether the organization or the winner will pay the withholding tax:

If the winner pays the withholding tax to the organization, the amount withheld is equivalent to 25 percent of the fair market value of the item won minus the amount of the wager, Whereas, if it is the organization that will pay the withholding tax, it has to withhold 33.33 per cent of the fair market value of the prize won minus the amount of the wager.

Exception to Regular Withholding

Generally, organizations do not withhold income tax on winnings from slot machines, keno, or bingo, unless they are constrained to “backup withhold” because of the failure  of each person who receives a payment of winnings subject to withholding  tax : To provide the organization with a statement on Form W-2G containing:

His or her name, address, and taxpayer identification number, and
To prepare a declaration that no other person is entitled to any portion of the payment.

Backup Withholding from Gaming Winnings Since an organization is required to report winnings on Form W-2G, the winner is supposed to provide his or her name, address, and taxpayer identification number to facilitate the filling up of the form properly. If the winner does not provide this information and if the winnings were not subject to 25 percent regular withholding, the organization must withhold income tax at the backup withholding rate of 28 percent.

Reporting the Withholding on Form 945       

The organization is responsible for paying regular or backup withholding from the gambling winnings, whether it was able to  collect the withholding from the prize recipient or not. The best time to collect withholding or backup withholding is before the prize is paid.

An organization reports regular and backup withholding from gaming winnings on Form 945, Annual Return of Withheld Federal Income Tax. Form 945 is an annual return and is due by January 31 of the year after the year in which the taxes were withheld.

Additional Examples of Reporting and Withholding    

Example: ABC Charity holds a raffle selling tickets for $25 each with a grand prize of $6,000 in cash. Form W-2G is filled up since the law requires the payment of  withholding tax  for raffle proceeds that exceed $5,000. Withholding on raffle prizes is not at all influenced by the ratio of the prize to the wager. Because the prize less the price of the ticket is $5,975 ($6,000 - $25 = $5,975), the withholding would be $1,494 ($5,975 x 25 percent).

Example: Nonprofit Charity conducts a fundraising event in which it sells raffle tickets for $2 each while the prize in kind is a large screen TV with a fair market value of $2,000. Because the prize less the value of the ticket is $600 or more and greater than 300 times the amount of the wager, the organization must complete form W-2G, but no withholding tax is going to be assessed because the prize is less than $5,000.

Example: CDN, an exempt organization, has declared a winner of $5,100 from one of the pull-tabs, which cost $10.The winnings, less the wager, exceed $5,000, therefore, Form W-2G is completed and federal income tax is withheld. Income tax withheld is reported on Form 945. The winner would receive $3,827 ($5,100 gross winnings less $1,273 withholding tax) (computed ($5,100 - $10) x 25 percent).

Example: CDN, an exempt organization, conducts a weekly bingo game. A payout of $1,300 is made for a single game. The winner furnishes identifying information, along with her SSN, to the organization. The organization must complete Form W-2G because the winnings exceed $1,200. The regular gambling withholding of 25 percent does not apply to bingo.
Example: XYZ Charity conducts a raffle in which it sells tickets for $10 each. The grand prize is a snowmobile with a fair market value of $7,000. As explained in the first example, the winnings are subject to regular gambling withholding and Form W-2G is required.

Failure to File Correct Information Returns by the Due Date      If an organization fails to file  a correct information return (Form 945 Annual Return of Withheld Federal Income Tax) on  the due date and cannot show reasonable cause, it may be subject to a penalty. The penalty applies in cases of failure to file on time, submission of returns containing incomplete information or the inclusion of incorrect information on the return. The penalty is  $50 per document unless correction is made before  certain time frames.

Failure to Furnish Correct Payee Statements    

An organization that fail to submit correct payee statements (Form W2-G Statement for Recipients of Certain Gambling Winnings) and cannot show reasonable cause may be subject to a penalty. The penalty applies for failure to provide the statement by January 31, failure to include all information required to be shown on the statement, or failure to include correct information on the statement. The penalty is $50 per statement, regardless of when correct statement is furnished, with a maximum of $100,000 per year.



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