What You Need to Know: Nonprofits & Small Games of Chance
With Summer now in full swing, this is the time of year for swimming, cookouts, and of course – carnivals. While we are all familiar with the exciting aspects of summer carnivals – the rides, music, food and of course the games, there are also a fair amount of rules and regulations for the nonprofit organizations that organize these events. Specifically, in 2012, certain changes were made to a non-profit organization’s requirements related to the administration of drawings, pull-tabs, and raffles that have become a staple at carnivals and are used as fundraisers by many nonprofit organizations. All non-profit organizations that may participate in these activities should be aware of the changes made by the passage of the Pennsylvania Small Games of Chance Act 2 of 2012 (Act), which brings with it the threat of civil and/or criminal penalties for non-compliance.
The Act places the responsibility for its enforcement in the hands of each county’s district attorney. For more information on the Act, we suggest that you contact your district attorney (For Lancaster County, contact the office of Craig Stedman at 717-299-8100) and/or seek out an attorney for legal advice. The following are just a handful of new provisions of the Act.
• Individual prize limits and weekly and monthly limits have been increased
• Certain Organizations are now eligible for up to 8-10 special permits allowing raffle prizes beyond the normal limit of $1,000. These prizes can be as high as $100,000 or $150,000 depending on the type of organization.
• All proceeds from games of chance must be kept in a separate bank account, apart from other funds of the organization.
• Organizations must submit annual reports to the PA Department of Revenue detailing the prizes awarded, the amounts of proceeds raised and how those proceeds were spent for public interest purposes.
• Criminal background checks are now required of the Executive Director or President, and the Organization’s Secretary. More background checks may be required as deemed necessary.
In addition to the changes outlined made by the Act, the IRS has its own requirements relating to these fundraisers that must be followed. The IRS requires that certain winnings from raffles, bingo, poker tournaments, and other games of chance be reported to the IRS and the winner on form W-2G. This form must be given to the winner of reportable prizes by January 31st of the following year and must be transmitted to the IRS on the Organization’s Form 1096 by February 28th if paper filing, or March 31st if filing electronically. The amount of winnings that are required to be reported vary by the type of game being played, but reporting requirements can start on winnings as low as $600.
As the payouts get larger, the requirements of the IRS get more arduous. For prizes over $5,000 on certain types of games such as raffles, the non-profit organization must also withhold 25% of the purse for personal income tax purposes. This withholding further requires the Organization to get the winner to sign the W-2G showing the withholdings and creates a filing requirement for Form 945, Annual Return of Withheld Federal Income Tax. If withholdings were less than $2,500, the Organization may remit them with Form 945. Otherwise, the Organization will need to remit the withholdings monthly or potentially more often. Additional withholdings may be required if the winner does not furnish the nonprofit organization with their correct taxpayer identification information in order for the Organization to report the winnings.
As you can see from above, the IRS requirements are not exactly straightforward. There are many special rules and caveats to the rules that are best left to trusted professionals to sort through. If not handled properly, there is potential for liability of the organization and its officers for the taxes owed on prize winnings and any associated interest and penalties. For assistance or advice as it relates to your Organization’s IRS requirements, please contact the non-profit specialists at Simon Lever, LLP. Allow us to handle your tax needs while you focus on making your carnival or other fundraiser the biggest success it can be.