RAFFLES – The Right Way

Washington Monument Joan M. Renner, CPA, Shareholder, Renner and Company, CPA, P.C. Download the article e

Raffles are gaining popularity for nonprofit fundraising. Often combined with a gala or other big event, raffles are accessible and fun. In a tight economy, attendees might hesitate to bid on a big auction item, but almost everyone can afford a raffle ticket. While everyone likes a nonprofit raffle, many nonprofits don’t realize the registration and reporting that raffles
require.

Many organizations give the winner a 1099 and hope for the best. If you’ve done that
in the past, you’re not alone. Unfortunately, that’s not the right way to run a raffle. The IRS
has increased its scrutiny of gaming activities, and has partnered with many states to compare
state gaming registrations to proper IRS reporting. If you run a raffle for your nonprofit, learn
about the requirements that may apply to you and make sure you’re running it right. To get
started, ask yourself the following questions:

Is our drawing a raffle?
A raffle is where the organization sells tickets, separately from tickets for admission to
an event, and one of the tickets is drawn from all tickets to win a prize. Raffle tickets are
tickets that are sold separately from event tickets. If everyone attending an event is
eligible to win a prize drawing, then it’s a door prize, not a raffle.
Key question—were raffle tickets sold separately from event tickets. If yes, it’s a raffle.

Is raffle income taxable as UBIT?
Chances are you were not granted exempt status to run raffles. Your raffle income is
not related to your organization’s exempt function. Typically raffle income is exempt
from UBIT only because the activity is conducted with substantially all volunteer labor.
Paid staff can be involved without ruining the exemption provided volunteer effort is
also present. The unofficial guideline is that substantially all means 85% or more.
Nonprofits conducting raffles should keep records of volunteer participation to support
that 85% of the effort was conducted by volunteers and that they did not receive any
substantial benefit while volunteering.

Key question—did volunteers do 85% of the work? If yes, then it’s not UBIT.

Do we have to report the winner’s prize to the IRS?

If the prize is more than $600, and more than 300 times the ticket price, then, yes, the
organization must report the winnings to the IRS using a W‐2 G. For example, if raffle
tickets are $50 and the prize is a $20,000 car, (greater than $50 x 300) then the
organization would have to report the winnings to the IRS on a W‐2 G. Unfortunately, it
is not correct to give the prize winner a 1099.Key question – was prize more than 300 times the ticket price AND more than $600? If yes to both, then a W‐2G is required.

How about withholding?
The organization must withhold and deposit federal income tax on the winnings. There
are penalties for failure to withhold. Tax withholding is required when the prize is more
than $5,000 and more than 300 times the ticket price. The withholding rate is 28% of
the prize (up from 25% in 2010).
Key question – was the prize more than $5,000? If so, the organization must make a tax
deposit.

How do you withhold tax on a $20,000 car?
The nicest raffles pay in the tax for the winner, making the prize even bigger. Others
offer the winner the choice of taking the prize or a cash equivalent, allowing the winner
to pay the tax and keep the rest of the cash. The organization must do one of two
things. Either: 1) ask the winner hand over $5,600 before they get the car; or 2) gross
up the prize to $27,778 and pay in f ederal income tax of $7,778. ($20,000/ (1 ‐ .28) =
$27,778.)

Do we have to register with the State?
Organizations holding raffles in Virginia must register with the Commonwealth of
Virginia. Other states have similar requirements. Virginia registration is required if the
organization expects to receive more than $40,000 in any 12 month period from
gaming. For details, contact the Virginia Department of Agriculture.

Key question—has raffle income exceeded $40,000? If so, then Virginia registration is
required.

Summary
Running a raffle can be a good source of revenue and a good fundraising tool. It gets many
people involved in supporting the organization and generates excitement and fun. To avoid
penalties and hassle, use these questions as a starting point to make sure you know the
registration, reporting and withholding requirements related to your raffle. For more
information, you can read IRS Publication Number 3079, Tax Exempt Organizations and
Gaming, available on irs.gov.