Bingo! How to Fundraise with Gaming without the Tax Risk.
Raffles, lotteries, scratch-offs, poker tournaments. It’s all fun and games, until the IRS starts looking over your shoulder.
From community 5Ks to themed dinners, nonprofit organizations are always looking for creative ways to raise funds. It’s no surprise that “gaming”, a category encompassing pretty much any game of chance, is at the top of the list. Not only is gaming a strong source of revenue, it also brings together the community and invites them to play. Gaming transforms fundraising into a fun, social event.
Of course, as is often the case when we’re talking about tax-exempt organizations, there’s a catch.
While gaming can be a great source of fun and fundraising, it’s also a tightly regulated industry. Nonprofits that fail to follow government regulations run the risk of unexpected taxes and penalties—not to mention negative PR. In some cases, organizations have even lost their tax-exempt status.
With that said, gaming can still be a valuable source of tax-exempt revenue. You just have to play your cards right.
When B-I-N-G-O Becomes U-B-I
When it comes to gaming, the biggest challenge for nonprofits is what’s called Unrelated Business Income (UBI).
Normally, money raised from a fundraising activity is tax-exempt (obviously, that’s the whole point of being a tax-exempt organization). However, if the IRS classifies the funds as UBI, then they may be subject to federal income tax at corporate rates. If a significant enough portion of your organization’s revenue is UBI, you may risk your tax-exempt status altogether.
Your goal, then, is to maximize the money you raise from gaming while minimizing the risk of it being taxed. We’ll talk about how to do that in a moment, but first let’s cover what it takes for funds to qualify as UBI.
What Counts as UBI?
On paper, Unrelated Business Income requirements look fairly strict. In order for funds to be considered UBI, they must have been generated by an activity that meets all three of the following requirements:
- The activity is not substantially related to your exempt purpose.
- It constitutes a trade or a business.
- It is regularly carried on.
It looks like the bar is set fairly high, right? Unfortunately, the majority of gaming activities easily meet these three requirements.
The first two are nearly automatic. Gaming is not substantially related to the tax-exempt purposes of most nonprofit organizations. What you do with the money you raise doesn’t matter, for tax purposes. Even if every penny you raise from your poker tournament is used toward your mission, the game itself is still considered unrelated.
(Unless it isn’t. Some social clubs have outmaneuvered this requisite by claiming that gaming fosters their community and does, in fact, further their exempt purpose. But don’t get your hopes up; this logic won’t work for most organizations.)
The second requirement is also pretty much unavoidable. Gaming is generally classified as a trade or business in itself, even if the funds are used for tax-exempt purposes. As long as the activity contains an element of chance, it will likely be considered a game, and will then be classified as a trade or business.
The third and final requirement for UBI, that the activity is “regularly carried on,” is the most workable. As long as gaming activities are occasional or sporadic enough, they will not meet the third qualification and the funds they generate will not qualify as UBI (since, remember, UBI must hit all three marks).
If, for example, your autism services organization holds an annual raffle, that will probably not qualify. However, if you begin holding your raffle monthly or weekly – or if coordinating your annual raffle takes most of the year – it will likely be considered “regularly carried on.”
Let’s Talk about Loopholes
You can avoid Unrelated Business Income taxation by designing your activity to fail to meet one or more of the requisites above. In most cases, that will mean hosting your gaming events occasionally or sporadically, to avoid the third requisite.
But what if you want a weekly gaming event? What if you want gaming to be a regular part of your fundraising strategy?
You’re in luck. Even if your gaming activity checks all three boxes above, it can still be exempt from UBI status as long as it’s: A.) operated by volunteer labor, B.) considered part of a certain public entertainment activity, or C.) a bingo game.
That’s right. For reasons we’re not going to go into right now, the IRS has special rules for bingo games. As long as the game truly qualifies as bingo – and not another game of chance disguised as bingo – then it may be excluded from UBI.
Even if your donors aren’t hardcore bingo fans, you can avoid paying UBI taxes if your gaming activity is operated “substantially” by volunteer labor. That generally means that 85% or more of the time spent producing the event is carried out by people who work for no compensation. (Note: The organization’s paid employees cannot be considered “unpaid volunteers,” even if they’re working off the clock.)
One final way to avoid UBI classification is by hosting your gaming fundraiser at a qualified public entertainment activity. At certain public events, usually fairs or expos promoting agriculture and education, organizations can legally raise tax-exempt funds from gaming.
The Bottom Line
This blog is just scratching the surface of everything a nonprofit should know when using gaming to raise funds. We didn’t discuss getting a state gaming license, nor did we go into the special reporting requirements for winnings or the mandatory controls for nonprofits.
The bottom line is that gaming is complicated, especially for tax-exempt organizations. At the same time, when operated legally and intelligently, it can be an excellent (and entertaining) source of revenue.
The key is proactivity. Develop a strategy to ensure you are in compliance with regulations ahead of time, and you can focus on hosting a successful fundraiser.
Trusted CPAs with Decades of NFP Experience
We can help. Since 1974, Dugan + Lopatka has served thousands of Chicagoland businesses and nonprofit organizations.
We specialize in the not-for-profit sector, leveraging our decades of collective experience and comprehensive accounting capabilities to help you navigate challenging decisions and build a smarter organization. From auditing and advisory to tax preparation and more, we are here to help you achieve your goals. That’s Accounting for What Matters.