Raffle tickets.

’Tis the Season for Raffle Awareness

’Tis the Season for Raffle Awareness

Raffles can be a fun way to raise money and engage participants!  Often an add-on to an annual fundraising event, such as a golf tournament or dinner, sales of raffle tickets can provide a significant source of revenue to allow tax-exempt organizations to support charitable, educational or other worthy causes.  Regulatory considerations, detailed records and internal controls are commonly overlooked for raffles.  It’s time to raise your raffle IQ and get your ducks in a row.

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Raffles vs. Door Prizes:  What’s the Difference?

Proceeds resulting from the sales of raffle tickets fall under the broad category of gaming activities, along with bingo, poker games, casino games, etc.  Gaming activities can lead to taxable activities subject to unrelated business income tax.

Door prizes do not generate revenue.  Eligibility to win a door prize is extended to all event participants without the requirement to purchase a ticket for the drawing.

Regulatory Considerations

Can Raffles Jeopardize My Tax-Exempt Status?  Raffles cannot be an organization’s primary activity.  The Internal Revenue Service (IRS) considers the amount of proceeds received and the amount spent for the activity, in addition to time spent and resources used when determining whether an activity is substantial.  Gaming activities (including raffles) are usually insubstantial compared to the other activities of an organization.  An insubstantial activity does not jeopardize an organization’s tax-exempt status.

Are Winnings Reportable to the IRS?  It depends.  A raffle prize winner may be reportable to the IRS on Form W-2G, Certain Gambling Winnings, if the value of the raffle prize is at least 300 times the cost of a raffle ticket and exceeds $600.  For example, a participant purchases a $3 raffle ticket and by luck, he wins a new computer valued at $1,000.  Because the value of the raffle prize exceeds $600 and it exceeds the $900 threshold (300 times the $3 ticket cost), the prize is reportable to the IRS on Form W-2G.   An organization should never report raffle winnings on Form 1099.

Do Tax Withholdings Apply?  Raffle prize winners may be subject to federal withholding tax of 25% or 28%, depending on the circumstances.  This rule applies to both cash and non-cash prizes.  Refer to the IRS’s Gaming Publication for Tax-Exempt Organizations for additional information.

Does Unrelated Business Income Tax Apply?  It’s possible.  Raffles are categorized as a gaming activity by the IRS.  The IRS considers gaming to be similar to the conduct of a trade or business carried on for profit.  These gaming activities can lead to taxable activities subject to unrelated business income tax if they are regularly carried on and conducted by compensated staff, among other factors.

Door prizes do not generate revenue because no prize tickets are sold. Because there is no revenue generated from door prizes, there is no unrelated business income to worry about.  Refer to the callout box on page 1 for definitions of gaming, raffles and door prizes.

Is Other Reporting Required?  Gaming activities are reported on the organization’s IRS Form 990 and Schedule G.  Raffle registration and other reporting requirements vary by state.  It’s best to check out the state requirements ahead of time and add any registration and reporting deadlines to your calendar. 

Detailed Records

What Records Should the Organization Keep?  Following are some suggested records to maintain on file: 

  • Event information, including the date and location where the raffle was held.
  • Raffle winners and prizes won, including date, description of prize, printed name, and signature.
  • Itemized receipts for all raffle prizes purchased.
  • List of all donated prizes for the raffle, including the values.
  • Ticket price and number of tickets sold.
  • Inventory list of any prizes not raffled.

Internal Controls

A successful raffle activity as part of a special event brings a crowd of attendees and plenty of distractions.  Strong internal controls provide needed structure to minimize chaos and to account for, and safeguard, raffle proceeds.  Below are suggested controls to add for your next raffle event:

  • Raffle tickets should be pre-numbered and a record of ticket numbers should be kept for each person assigned to selling tickets.
  • Pre-sell raffle tickets prior to the special event to limit cash and checks received on the event day.
  • Compare raffle proceeds to tickets sold, by person and in total, for the event.
  • Account for all raffle ticket numbers sold and not sold.
  • Encourage credit card payments.
  • Segregate and assign cash-related duties to paid employees or board members.
  • Closely supervise volunteers at all times.
     

Michelle L. McCann, CPA, is a partner in Lindquist LLP's San Ramon office.  She is primarily responsible for overseeing quality control for preparation of exempt organization and employee benefit plan returns, including Forms 5500, 990, LM-2 and 199.  Michelle also provides QuickBooks training and support for the firm's clients.  Contact Michelle at mmccann@lindquistcpa.com.

Our firm provides the information in this e-newsletter for general guidance only.  It does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind.  The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers.  Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.  Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer.  The information is provided "as is," with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.

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