Are the Odds in Your Favor? What to Know about Raffles

Segdrick Byrd

Raffles are commonly used by not-for-profit organizations as a way to raise funds, but that does not mean that raffles are without challenges. IRS rules surrounding gaming apply, as do state and local laws. Not knowing the rules may come back to haunt your organization.

UBI ramifications

Not-for-profits must pay income tax on unrelated business income (UBI), defined as income from a trade or business, regularly carried on, that is not substantially related to the organization’s exempt purpose. The IRS considers raffles to be a form of gaming, which is a trade or business. Thus, your raffle income may be subject to UBI tax.

If you routinely hold raffles, it is possible they could be considered “regularly carried on,” and raffles likely are not related to your exempt purpose. In addition, losses in another unrelated trade or business cannot be used to offset UBI generated by your raffle.

However, raffle income can be exempted from UBI tax if the raffle is conducted with “substantially all” volunteer labor. The term has not been formally defined, but the IRS’s unofficial guideline is that 85% or more of the labor running the raffle should be from volunteers. Keep records to document your level of volunteer support.

IRS reporting

Your not-for-profit must report when the winnings are $600 or more and at least 300 times the amount of the winner’s wager (the raffle ticket price). You can deduct the wager amount when determining if the $600 threshold is met. For example, let’s say you sell $5 tickets and your winner receives $2,500. Because the winnings ($2,495) are more than $600 and more than 300 times the amount of the $5 wager, you must report the winnings to the IRS.

You should file Form W-2G, “Certain Gambling Winnings,” and give a copy to the winner to show reportable winnings along with any related income tax withheld. The winner should provide you with their name, address and Social Security number on Form W-9 or Form 5754, to include with the filing.

Income tax withholding

Your organization will need to withhold federal income tax from any winnings and remit that amount to the IRS if the proceeds (the difference between the winnings and the amount of the wager) are more than $5,000. If winnings are not in cash (for example, a vacation package or motor boat), the proceeds are the difference between the fair market value (FMV) of the item won and the wager amount. If the value of a noncash prize is not obvious, obtain a valuation before the drawing.

You must withhold 24% in tax from the winnings. Note that the 24% rate applies to the total amount of the proceeds from the wager, not just the amount that exceeds $5,000. Say that you hold a raffle with $2 tickets and the winner receives $7,000. Because the proceeds ($6,998) exceed $5,000, you must withhold $1,680 ($6,998 × 24%).

For noncash prizes valued at more than $5,000, your organization has one of two options:

1. The winner reimburses you the amount of withholding tax that you must pay to the IRS; or
2. You pay the withholding tax on behalf of the winner, calculated at 31.58% of the FMV less the wager amount.

Taxes withheld from raffle winnings must be reported on Form 945, “Annual Return of Withheld Federal Income Tax.” Include the total amount of tax withheld that you reported on all the Forms W-2G filed for the year. File by January 31 following the close of the tax reporting year. If taxes withheld are under $2,500 in total, you may remit to the IRS when filing Form 945. If they are greater than $2,500, you must remit them electronically on a monthly or semiweekly basis, depending on the total tax.

Finally, confirm that winners furnish a correct Social Security number to your organization. Otherwise, you will usually be required to withhold 24% of raffle prizes for federal income tax backup withholding.

A winning ticket

Everyone likes the idea of raffles, but be sure you know what tax reporting may be necessary before you feature one in a fundraiser. In addition to your federal tax ramifications, it is important to follow all state and local tax obligations. Contact us to make sure your raffle meets all the requirements.

For more information, contact Segdrick Byrd at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.

What to Know about Charity Navigator’s Updated Methodology

Charles Burke, CPA

Not-for-profit evaluator Charity Navigator — which has rated nearly 210,000 organizations as of Fall 2023 — has made significant changes to how it calculates its scores. Its Accountability & Finance scores now are calculated based on defined not-for-profit characteristics. Larger, donor-funded charities will undergo an in-depth evaluation, while organizations that are smaller or not funded by donors will be assessed with a more-focused set of metrics. Charity Navigator also is removing metrics such as administrative expense ratios, fundraising ratios and program expense growth metrics.

Notably, Charity Navigator is taking steps to account for anomalies caused by the COVID-19 pandemic. For example, if the pandemic significantly affected a not-for-profit’s revenue in 2020 or 2021, that year’s IRS Form 990 will be removed from the Accountability & Finance score calculation — welcome news for many organizations.

Engaging donors as public trust in not-for-profits continues to fall

Independent Sector’s fourth annual Trust in Civil Society report reveals that a decline in not-for-profit trust accelerated in 2023. Just 52% of Americans surveyed indicated that they trust not-for-profits to do what is right— a drop of 4% from the previous year. As the CEO of Independent Sector noted, challenges confronting not-for-profits and philanthropy become increasingly more difficult without trust.

According to the report, engagement with the public is more important than ever in this environment. As with past studies, the most recent survey found that familiarity is strongly correlated with trust, but personal engagement is critical. Those who regularly engage with not-for-profits have greater trust in the sector, and not-for-profit messaging that focuses on value statements and data (rather than data alone) is most effective at building trust.

DOE announces $45 million for energy-efficiency upgrades for not-for-profits

The U.S. Department of Energy (DOE) has released details on its new Renew America’s Nonprofits grant. The grant will provide $45 million in awards to nine “Prime Selectees.” The selectees will collaborate with nearly 40 partners to deliver energy improvements in approximately 300 facilities across 28 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.

According to the DOE, energy costs are among the highest operational expenses for not-for-profit. So, reducing energy use can free up a meaningful percentage of funds. Prime Selectees will “subaward” grants of up to $200,000 per facility and provide expertise in energy and project management to help execute much-needed retrofit projects. At least 60% of subawards will go to nonprofits in disadvantaged communities.

For more information, contact Charles Burke at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.