Charity Raffles – Tread Carefully
Raffles can be a fun and effective way for non-profit organizations to engage the public and raise funds to support the organization’s mission. However, from the perspective of the non-profit, there are legal considerations that must be kept in mind when conducting gaming activities in South Dakota.
From a federal compliance standpoint, non-profit organizations must be mindful of the Internal Revenue Service’s (IRS) reporting and withholding requirements.
The prizes are taxable income to the winners, so the non-profit must ensure it properly reports the raffle prizes to the IRS. Generally, raffle prizes must be reported on Form W-2G with a copy to the winner if:
- The amount paid, reduced by the amount the person paid for the chance to win a prize, is $600 or more; and,
- The payout is at least 300 times the amount the person paid for the chance to win a prize.
Additional considerations are needed for larger prize winnings. If the fair-market-value of winnings totals more than $5,000, the non-profit is required to withhold and submit to the IRS 25% of the winnings. If the winner fails to supply a taxpayer identification number, then the non-profit must withhold 28% or 33% of the total proceeds, depending on who pays the withholding tax.
Form W-2G must be issued to the winner by January 31 following the year end of the organization. The organization must use Form 945 to report and send withheld amounts to the IRS.
Many states and localities regulate gaming activities. From a South Dakota compliance standpoint, if raffle tickets are sold statewide, written notice of the activity should be submitted to the Secretary of State prior to selling any tickets. Locally, the Rapid City Municipal Code states 30 days’ written notice of intent must be filed with the City Attorney.
What can donors deduct?
Charity raffle donors may be surprised to learn that their “contribution” is not deductible. Those who play the game are expecting (hoping) to win something in return, so the money exchanged is considered a purchase/sale of goods, whereas a charitable donation is a voluntary gift to the non-profit with no expectation of receiving anything tangible in return.
Raffles give the public the opportunity to contribute money to a great cause while enjoying the chance to win prizes, whether it be a cash prize or otherwise. Non-profits should not feel discouraged from conducting raffles which could result in meaningful income to further their mission, but rather empowered to conduct such activities while complying with regulations.
Please contact KT if you would like our assistance in understanding the implications of your organization’s raffle activities.