July 16, 2012 Gaming in Tax-Exempt Organizations Jim Competti and Cheryl Teser
Six Important Topics for Organizations that Conduct Gaming 1. Impact of gaming on tax-exempt status 2. Internal controls and recordkeeping 3. Form 990 filing requirements 4. Unrelated business income tax 5. Filing requirements for payments to individuals 6. Wagering and excise taxes 2
Impact of Gaming on Exempt Status Organizations most likely to engage in charitable gaming: 501(c)(3) organizations operated exclusively for charitable purposes 501(c)(4) social welfare organizations 501(c)(7) social clubs 501(c)(8) and (10) fraternal organizations 501(c)(19) veterans' organizations Rules differ for each of these subsections 3
501(c)(3) Organizations Must be organized and operated exclusively for charitable purposes Misconception: Proceeds from gaming that further the organization s charitable purpose is a charitable activity Instead: Conduct of an activity, not the proceeds raised, has to further the organization s exempt purpose 4
501(c)(3) Organizations Therefore; Gaming is not inherently charitable and the conduct of this activity is the same as that of any other unrelated trade or business But; Organizations can conduct activities like gaming as long as the activities are not substantial in relation to it s exempt function activity 5
Warning! Substantial activity that doesn t further the exempt purpose will put the organization in jeopardy of losing it s tax exempt status 6
The Impact of Gaming on Fraternal and Veteran s Organizations Fraternal and Veterans Organizations 501(c)(8),(10) and (19) What s Okay Gaming activities for members only (furthers exempt social and recreational purposes of the organization) 7
Learn more about this in Chapter 1 of Pub. 3079 The Impact of Gaming on Fraternal and Veterans Organizations What s Usually Not Okay Sponsoring gaming that is open to the general public and generates income from nonmembers that exceeds 50% of the total organizational income (May create unrelated business income tax and negatively affect tax exempt status of the organization) 8
Internal Controls and Recordkeeping Officers of the exempt organization should: Supervise the conduct of the gaming operation Choose gaming location Review and approve leases Assign multiple persons to the sale of games Monitor serial numbers of the games 9
Maximizing Internal Control: Separating/Segregating Worker s Duties 10 Follow Along on Page 14 of Publication 3079 The game manager Overall control of game execution One cashier Receives all cash and records serial numbers of games sold One separate cash controller Prepares inventory and paid-out reports One inventory controller Reviews daily sheets for inventory usage and profit achieved Separate check writer Makes payments towards gaming expenses The Board of Trustees Reviews daily sheets with past reports for consistency and ensure internal controls are working correctly
Remember: Poor internal controls can result in losses to the organization Review Chapter 3 of Publication 3079 for an overview of recordkeeping and internal control practices 11
Form 990: Why it s unique 12 Turn to Chapter 4 (page 15) of Publication 3079 to follow along Purpose To provide information on the programs and activities of your organization Not to report or pay taxes Information Most information provided is available to the public Requirements Satisfies most state requirements on its own (40 states at this time)
Three Form 990 Versions An organization s annual gross receipts and assets determine which form is filed. Form 990, Return of Organization Exempt From Income Tax For large organizations gross receipts greater than or equal to $200,000 & total assets greater than or equal to $500,000 Form 990-EZ, Short Form Return of Organization Exempt From Income Tax For medium organizations gross receipts greater than $50,000 and less that $200,000 & total assets less than $500,000 13 Form 990-N, e-postcard (electronic only) For small organizations gross receipts less than $50,000
How does the IRS know about an organization s gross receipts? From a number of sources: State liquor control agencies State agencies regulating gaming Holders of group exemption rulings Remember: Failure to file Form 990 can result in an audit on exempt organizations that conduct gaming 14
Unrelated Business Income (UBI) UBI is derived from a regularly carried on trade or business that is not substantially related to exempt purposes. For more information refer to Publication 598, Tax on Unrelated Business Income of Exempt Organizations AND Chapter 2 of Publication 3079 Your Exempt Organization s Obligation: When the gross unrelated business income is over $1,000: Must file a Form 990-T, Exempt Organization Business Income Tax Return 15
Filing Information Returns Who and When? When making payments to players for certain gaming prizes To employees who work for the organization To independent contractors 16
Information Return: Payments of Prizes to Players Form W-2G, Certain Gambling Winnings Issue this form when an individual wins a prize with a minimum specific dollar amount (which depends on the gaming activity and amount of prize) 17 A W-2G Chart is located on Page 22 of Publication 3079 A W-2G is required for: Traditional Bingo: Prize paid is equal to or greater than $1,200 Raffles : Prize paid is equal to or greater than $600 and at least 300 times the amount of the wager Slot Machines: Prize Paid is equal to or greater than $1,200
Exempt Organizations and Federal Employment Taxes Only Exemption: 501(c)3 organizations are NOT required to pay FUTA taxes Exempt organizations must pay employment taxes under these laws: Federal Insurance Contributions Act (FICA) Federal Unemployment Tax Act (FUTA) Federal income tax withholding Organizations must pay the employers share of Social Security and Medicare taxes and withhold the employee s share of Social Security and Medicare taxes and federal income tax from the employee s wages 18
Remember: If gaming workers are compensated, you must file and pay employment taxes 19 Who is an Employee? Consider these factors: 1) Does the organization or the worker provide the equipment used 2) Does the worker have the opportunity to profit or suffer a loss 3) Does the organization have the right to discharge the worker 4) The permanency of the relationship 5) The relationship the parties thought they created
Requirements for Independent Contractors An independent contractor is different than an employee because: he/she is self-employed the organization has less authority to direct him/her 20 Note: Dates/Deadlines for Forms W-2 and 1099 are identical Filing Requirements: Provide Form 1099-MISC, instead of a Form W-2 File to report payments of $600 or more (threshold applies to all payments made during the calendar year, not to any one payment)
Wagering and Excise Taxes on Gaming Activities Two Types: Excise tax imposed on the amount of the wager Occupational tax imposed on the persons engaged in receiving wagers Determining if wages are subject to tax depends on: The facts and circumstances of the types of wagering conducted The benefits derived from the wager 21
Facts and Circumstances of Wagering Pull Tabs/ Drawing: Meet the definition of taxable wagers placed in a lottery Traditional Bingo: Excluded from wagering taxes because ALL participants are present. 22 Exempt Organizations are subject to wagering taxes if the net proceeds from the activity inured to the benefit of any private shareholder or individual. Wagering taxes: State Authorized: 0.25% Unauthorized: 2%
More Information Charities and Nonprofits page (forms, publications, general information): www.irs.gov/charities Web-based training program for 501(c)3 organizations: StayExempt.irs.gov General questions about exempt organization forms or activities - or to verify tax-exempt status call: 1-877-829-5500 (toll free) 23
Thank-you for listening! 24