As a not-for-profit dealing with the never-ending struggle to raise funds, you might look for more creative ways to meet your budgeted revenue goals. In some cases, certain activities surrounding high-profile events, such as Super Bowl Squares or NCAA March Madness bracket pools, may seem like enticing fundraising opportunities.
Hosting one of these contests and splitting the total pot between your not-for-profit and the winner is a win/win, right? Not always. Be aware that these types of activities come with risks and potential consequences based on the nature of the games involved and how winnings are paid out.
First and foremost, based on the definition of gaming and gambling in various states, if a contest is considered a “game of chance” it is also potentially illegal. And while sports betting is allowed in many states, it’s important to note that only licensed gaming entities approved by their state are able to administer wagering on sports, meaning a nonprofit can’t simply open a sportsbook to start raising funds. Your legal advisers can help you determine what is or is not allowed in your specific state and situation.
An individual winning cash from coworkers is also quite different from receiving potentially significant funds that could appear on your organization’s IRS Form 990. While state attorneys general have not made it a priority to pursue action related to these contests, a not-for-profit taking money from one potentially opens the door to questions or action from a governmental agency. Further, the use of the internet or having participants in multiple states opens the door for federal involvement, however unlikely.
Beyond potential legal issues, game-of-chance contests also raise certain tax questions. The IRS addresses this topic in Publication 3079. Here are a few of the important points:
- As a 501(c)(3), you generally will not risk your tax-exempt status if your gaming activities are an insubstantial part of your activities.
- Your organization could be subject to unrelated business income tax (UBIT) triggered by gaming and gambling activities if they are “regularly carried on.” Infrequent gaming, such as annual events, do not fall into this category.
- Wagering taxes are often levied on entities that allow betting on sports, but if the funds raised are used for your not-for-profit organization’s tax-exempt purpose, you should not be assessed any wagering tax.
- Finally, if your organization has to pay the contest winner’s portion directly, you will need to report certain amounts to the IRS, and at higher thresholds some tax amounts must be withheld.
Most not-for-profit entities abhor the idea of turning down funds from willing donors, but the risk of tax or reporting obligations, or the appearance of any impropriety, weighs heavily as well. While those risks are most often mitigated by the fact that the dollar amounts would likely be relatively small and that regulating entities have shown little interest in prosecuting such activity, it is a best practice to keep these types of fundraisers rare or have outside parties, such as a separate funding organization or a board member, run the pools. Then that outside party can donate your organization’s share so it is treated as a regular contribution in the financial records of the entity.
Talk with your service team if your not-for-profit is considering raising funds through a contest or other similar arrangement to help ensure you are taking any prudent steps necessary.
Contact Sean Kilcher at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.