Category Archives: Raffle Regulations

Prizes, winnings and taxes – Part 2

How to figure the fair market value for tax reporting

Calculating tax on prize winnings

Raffle winnings need to be run through a formula to determine the amount of tax owed.

Last time, we looked at how to determine whether a raffle prize must be reported to the IRS. Now let’s look at some of the perhaps lesser-known or less-understood aspects of income tax law as it relates to raffles.

Backup withholding applies to raffle prizes, to the tune of 28% of the total proceeds, if the prize is otherwise subject to reporting (that is, the amount of the prize minus the amount wagered is $600 or more and 300 times the amount of the wager) and the winner doesn’t provide a correct taxpayer identification number (TIN) – a Social Security number, an individual taxpayer identification number or an employer identification number (EIN).

The rules are a little different for noncash prizes: the winner must pay the organization 25% of the fair market value of the prize minus the wager cost.

For example, let’s say Emma purchased a $1 ticket for a raffle conducted by an exempt organization called ABC. On March 28, 2012, Emma won a drawing for a car with a fair market value of $20,000. Because the prize exceeds $5,000 and the fair market value of the car is $20,000, the tax on the fair market value of the prize is $4,999.75 [($20,000 minus the $1 ticket cost) x 25%)]. Emma must pay $4,999.75 to ABC, which will in turn remit this amount to the IRS on Emma’s behalf.

To remit this tax, ABC will need to indicate the car’s fair market value ($20,000) in box 1 and the amount of the withholding tax paid ($4,999.75) in box 2 on Form W-2G.

What if the organization pays the withholding tax as part of the prize? In such a circumstance, the organization must pay tax not only on the fair market value of the prize less the wager, but also on the taxes it pays on behalf of the winner. This requires the use of an algebraic formula.

To do this, the organization must pay a withholding tax of 33.33% of the prize’s fair market value and report the grossed-up prize amount – the fair market value of the prize plus the amount of taxes paid on behalf of winner – in box1of Form W-2G and the withholding tax inbox2.

If ABC pays the withholding tax on Emma’s behalf, the withholding tax is $6,665.67 [($20,000 fair market value of prize minus the $1 ticket cost) x 33.33%]. ABC must report $26,666 as the grossed-up prize winnings inbox1of Form W-2G, and $6,665.67 withholding tax inbox2.

To report and send withheld tax to the IRS, the organization must send in Form 945 by Jan. 31 of the year following the year in which taxes were withheld (be sure to mark the Form 945 checkbox on Form 8109, the federal tax deposit coupon!) and list its EIN on Forms W-2G, 1096 and 945. Don’t have one? Use Form SS-4, Application for Employer Identification Number or visit www.irs.gov under the topic Employer ID Numbers on the Businesses Contents page to apply for an EIN.

 

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Raffle prizes, winnings and taxes

Don’t overlook the post-raffle details …

Calculating tax on prize winnings

Raffle winnings need to be run through a formula to determine the amount of tax owed

Sometimes it comes as a surprise to raffle organizers that the prize their organization is offering may be subject to federal (and possibly state and local) income taxes. The formula for calculating the amount of tax to pay, if any, may seem complicated, but it’s actually pretty straightforward.

First of all, determine whether your organization needs to report the raffle prize to the IRS. In general, if the amount paid for the prize minus the cost of the wager equals $600 or more, and the payout is at least 300 times the amount of the wager, the prize must be reported.

As an example, let’s say Jimmy bought a $1 ticket for a raffle conducted by an exempt organization called XYZ and won $1,000. Simple math tells us that $1,000 minus $1 equals $999 – which is greater than $600 – and that the $1,000 payout is more than 300 times the cost of the $1 ticket. XYZ will need to file Form W-2G with the IRS and give Jimmy a copy of Form W2-G as well.

Jimmy will need to fill out some paperwork, too – Form 5754. This Statement by Person(s) Receiving Gambling Winnings form states his identity and that of anyone else who is entitled to the winnings, and XYZ must keep the form for four years and have it available for inspection.

(If Jimmy receives the winnings but is not the actual winner – or if he is a member of a group of winners who won with a single ticket – as the recipient he must still furnish XYZ the information listed in Form 5754. XYZ will file Form W2-G based on the information Jimmy provides in Form 5754.)

The deadline for issuing Form W2-G to prize recipients is January 31 of the year after the year of the raffle; the deadline for filing Form W2-G is the last day of February of the year after the year of the raffle. So if Jimmy won his $1,000 prize on May 8, 2012, XYZ must issue Form W2-G by January 31, 2013 and file it by February 28, 2013.

If the winnings from a drawing exceed $5,000, the organization paying out the prize must withhold 25% from the winnings and report that amount on Form W2-G. So let’s say Alice bought a $1 ticket at an XYZ raffle and won a prize of $6,000. Subtracting $1 from $6,000 results in $5,999, and so 25% of $5,999 – $1,499.75 – must be withheld from her winnings.

The kicker? If XYZ fails to withhold that $1,499.75 before distributing the prize, XYZ will be held liable for the withholding tax.

Next time, we’ll look at backup withholding and what to do when the prize isn’t cash or if the organization pays the tax as part of the prize.

Avoid hassles by knowing, and following, your state’s laws: part 2

The rules for operating a raffle differ from state to state. Some states highly regulate raffles, while other states’ rules are comparatively relaxed. What does it take to operate a raffle?
A quick look at a few states’ regulations can help get you started.

Part Two: California, Florida and North Carolina Games of Chance Laws

California Raffle Drawing Regulations

Raffles and lotteries are highly regulated in California, where gambling is prohibited by the state constitution. However, under what is known as the “90/10 rule,” charities and certain other private nonprofit organizations are permitted to conduct raffles with the stipulation that at least 90% of the gross receipts go to beneficial or charitable purposes within the state.

Rules and Laws for Raffle Contests In California

In light of the 90/10 rule, 50/50 raffles – in which 50 percent of ticket-sale revenue is awarded as the prize and 50 percent of the revenue is retained by the organization conducting the raffle – are not permitted. The use of a gaming machine, apparatus or a device, such as a slot machine, is prohibited, as is operating or conducting a raffle over the Internet (but the organization conducting the raffle may advertise the event online).

Nonprofits must register with the attorney general’s Registry of Charitable Trusts prior to conducting the raffle. Registration is required if the tickets for a drawing are free of charge, solicitations of voluntary donations to the organization The raffle registration form needs to be filed at least 60 days before the raffle’s scheduled date to allow enough time for processing, and the registration process must be completed prior to conducting the raffle. The registration period runs from September 1 to August 31 every year.

Schools, hospitals and nonprofit religious organizations are exempt from the registration requirement.

After the raffle is held, a financial disclosure report must be filed. Called the “Nonprofit Raffle Report form,” the report provides the date and location of the raffle, the total funds received, the total expenses for conducting the raffle, the charitable or beneficial purpose for which raffle proceeds were used or the amount and organization to which proceeds were directed.

Florida “Drawings By Chance” Rules

Charitable nonprofit organizations are permitted to hold “drawings by chance” in Florida as a fund-raiser. To conduct a drawing, the following is required:

Rules and Laws for Raffle Contests In Florida

  1. The drawing’s rules of conduct and operation must be disclosed,
  2. The organization’s full name and principal place of business,
  3. The source of the funds used to award cash prizes or purchase prizes, and
  4. The date, hour, and place where the winner will be chosen and the prizes will be awarded (unless the drawing’s brochures, advertisements, notices, tickets, or entry blanks are offered to the public less than 3 days prior to the drawing).

Additionally, it’s against the law to require an entry fee, donation, substantial consideration, payment, proof of purchase, or contribution to enter the drawing or be selected to win a prize. However, an organization is permitted to suggest a minimum donation or state the suggested minimum donation on any printed promotional or other material in connection with the event.

North Carolina Raffle Laws and Regulations

North Carolina law permits a nonprofit organization to operate no more than two raffles per year. Limits are placed on the maximum cash prize that may be offered or paid for any one raffle ($125,000). If merchandise is used as a prize and is not redeemable for cash, the maximum fair market value of that prize is also $125,000.

In any calendar year, the total cash prizes offered or paid in a raffle may not exceed $125,000; the total fair market value of all prizes offered by a nonprofit organization or association, either in cash or in merchandise that is not redeemable for cash, is also limited to $125,000 per calendar year.Rules and Laws for Raffle Contests In North Carolina

A minimum of 90% of the net proceeds of a raffle must be used for charitable, religious, educational, civic, or other nonprofit purposes. None of the net proceeds of the raffle may be used to pay any person to conduct the raffle or to rent a building where the tickets are received or sold or the drawing is conducted.

Additionally, a raffle may not be conducted in conjunction with bingo. (Bingo requires a license from the Department of Crime Control and Public Safety, with an application fee currently set at $200.)

Real property may be offered as a prize in a raffle. The maximum appraised value of real property that may be offered for any one raffle is $500,000, and the total appraised value of all real estate prizes offered by any nonprofit organization or association may not exceed $500,000 in any calendar year.

For a complete list of raffle drawing regulations for each state and Canadian province, click here.

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Avoid hassles by knowing, and following, your state’s laws: part 1

The rules for operating a raffle differ from state to state. Some states highly regulate raffles, while other states’ rules are comparatively relaxed. What does it take to operate a raffle?
A quick look at a few states’ regulations can help get you started.

Part One: New York and Ohio Games of Chance Laws

New York State Raffle Drawing Regulations

In New York State, a raffle is defined as a game of chance in which a participant pays money in return for a ticket or other receipt. Players buy tickets with a number, color or symbol on them with the hopes of that particular number, color or symbol being drawn by chance so that they may be awarded a prize. 50/50 and split-pot drawings fall under this category.

Rules and Laws for Raffle Contests In New York State

Organizations that are “authorized” to hold a raffle include, in part, bona fide religious or charitable organizations, bona fide educational, fraternal or service organizations, or bona fide organizations of veterans or volunteer firefighters that operate without profit to their members.

Individuals and commercial businesses are prohibited from obtaining a games of chance identification number and are, in fact, restricted by law from conducting any type of raffle.

Being an “authorized” organization is not enough, however. The organization must also be based (“domiciled”) in a municipality that has passed a local games of chance law.

Having met the criteria, an organization may apply at no cost for a games of chance identification number by completing a 1A application and submitting it to the Racing and Wagering Board. The application will require a copy of the organization’s constitution and bylaws and/or incorporation papers.

Once an organization has been issued a games of chance identification number, it must submit to the municipal clerk and to the Racing and Wagering Board a completed “verified statement” (known as Form GCVS-1) that lists the scheduled drawing dates.

For forms and more information, go tohttp://www.racing.state.ny.us/charitable_forms.php#raffles

 

Ohio Raffle Contest Rules

In Ohio, charitable organizations; public, chartered nonpublic and community schools; and veteran’s, fraternal and sporting organizations are permitted to conduct a raffle to raise money for that organization or school. They are not required to obtain a license to conduct a raffle drawing that is not for profit. However, they must be exempt from federal income taxation under subsection 501(a) and must be described in subsection 501(c)(3), 501(c)(4), 501(c)(7), 501(c)(8), 501(c)(10), or 501(c)(19) of the Internal Revenue Code.

Rules and Laws for Raffle Contests In OhioA chamber of commerce may conduct no more than one raffle per year to raise money for that chamber. And no individual person (with the exception of a representative of the above mentioned charitable organizations, schools and chambers of commerce) is allowed to conduct a raffle drawing, whether for profit or not for profit.

Bingo is a different matter. Only a charitable organization that has obtained a license pursuant to section 2915.08 of the Revised Code, is permitted to conduct or advertise bingo.

To conduct bingo, instant bingo at a bingo session or instant bingo other than at a bingo session, a charitable organization is required to apply to the state attorney general for a license to conduct any of these types of bingo. The application must be completed and submitted prior to Jan. 1.

The license fee to conduct bingo is $200, while the license fee for a charitable organization that has not previously been licensed to conduct instant bingo is $500. A charitable organization that has previously been licensed to conduct instant bingo will find that its license fee to again conduct those bingo games will vary, based on the gross profits it received from operating instant bingo during the one-year period ending on the 31st day of October of the year immediately preceding the year for which the new license is sought. The attorney general may establish lower licensing fees under certain circumstances, such as organizations that run bingo for fewer than 26 weeks, etc.

Along with the license application, an applicant will need to include a statement indicating whether the organization has ever had any previous application refused, whether it previously has had a license revoked or suspended, and the reason stated by the attorney general for the refusal, revocation or suspension. Also required is a statement of the charitable purposes for which the net profit derived from bingo (other than instant bingo) will be used, and a statement of how the net profit derived from instant bingo will be distributed.

For more information, check out http://www.gambling-law-us.com/Charitable-Gaming/Ohio/

For a complete list of raffle drawing regulations for each state and Canadian province, click here.

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‘Tis the Season for Charitable Contributions

Season of GivingAs this holiday season rapidly approaches, you might want to get your charitable efforts well underway before your schedule spins out of control … again … like it does every year.

So right now, before bad weather sets in and everybody heads south for the season, it’s the perfect time to catch local businesspeople and ask for donations of cash or products for your next raffle or drawing. With Thanksgiving still a couple of weeks away, you’ll be able to find most business owners in their offices. Many of them will be feeling warm, charitable thoughts (and it’s not just because they haven’t yet opened their credit card statements or suffered through the 300th rendition of “I want a hippopotamus for Christmas”.)

At year’s end, many businesses might have unsold inventory they need to clear out to make space for next year’s products. And, let’s not overlook the fact that many of these businesses can be greatly benefited by squeezing in a bit of last-minute tax deductions! Many businesses have their fiscal year’s-end coming up and every little bit makes a difference.

There are a few rules your business friends should be aware of before they start packing your arms full of unsold inventory. I recommend reading a recent article by About.com’s contributor William Perez called ” Tax Deduction for Charity Donations Contributions to churches and non-profits are tax-deductible.”

Perez points out that a gift of cash or property must meet certain criteria in order to be tax-deductible.

Businesses must actually donate cash or property. A pledge or promise to donate is not deductible until they actually pay.

They must contribute to a qualified tax-exempt organization.A qualified charity will be able to provide the business with the proper documentation to prove their 501(c)(3) tax-exempt status. Not all organizations, such as churches and religious organizations are required to obtain 501(c)(3) status from the IRS.

Proper records must be kept. This includes saving canceled checks, acknowledgment letters from the charity, and appraisals for donated property. Contributions of property (other than cash) are also subject to strict record keeping and substantiation rules. The business must be able to substantiate the fair market value of the goods or property donated, plus keep any written acknowledgments you receive from the charity.

There are limitations on the deduction that can be applied. A charitable contribution’s tax deduction may be limited. There are limits specific to charitable contributions, and there are general limits on itemized deductions. A properly certified accountant is the best source for this information.

Not all contributions are tax deductible. Contributions are not tax deductible if given to any of the following:

  • Political parties, political campaigns, or political action committees.
  • Contributions given to individual people.
  • Fees or dues paid to professional associations.
  • Contributions to labor unions, chambers of commerce, or business associations.
  • Contributions to for-profit schools and hospitals.
  • Contributions to foreign governments.
  • Fines or penalties paid to local or state governments.
  • The value of your time for services rendered to a non-profit.

Charities should be ready to provide documentation to businesses regarding their donations in a timely manner. This includes both cash and non-cash contributions. No tax deduction will be allowed if the taxpayer cannot provide any supporting documentation –  and that might make the business owner less likely to contribute next year.

IRS Resources:

 

How to hold a “Find the Queen of Hearts” drawing

We are always on the lookout for tips and suggestions to help our customers maximize their fund raising success. After we read about Dick’s accomplishments, and his kind words about how our products have worked out for his organization, I decided to learn more about the“Search For The Queen Of Hearts” so I could share it with you.

The information provided here is taken from the New York State Racing & Wagering Board’s web site and it has been abridged for readability. Every state has its own rules and regulations, so make sure you are in compliance with all rules in the state you plan to hold your drawing before you get started. If you aren’t sure where to find this information, click here and use the pull-down menu to find your state.

 

Queen Of Hearts Raffle Tickets

What you need to get started:

·         A series of two-part, sequentially numbered raffle tickets

·         A raffle ticket drum or receptacle

·         A standard deck of fifty-two playing cards plus two Jokers

·         A game board into which fifty-four playing cards can be

placed facedown, side-by-side, and held securely by a locking, transparent cover

1) Determine a price for each ticket and print all the pertinent information – like cost of each ticket, drawing dates, prizes to be awarded, and whether or not the winner needs to be present at the drawing. Make sure the stubs have an area for name and telephone number of the purchaser (this part goes into the drum). The body of the ticket is kept by the purchaser. Print sequential numbers on both parts (our Raffle Ticket software does this for you automatically).

2) Have a certified member shuffle the deck and, without revealing any of the faces, place the cards facedown, side-by-side, onto the game board. Lock down a transparent game board cover to secure the cards in place.

3) One raffle ticket shall be drawn each week from among all of the tickets sold for each drawing, except for the first week and the twenty-sixth week (if necessary), when three drawings shall be held. If the Queen of Hearts is not revealed within twenty-six weeks of drawings, one ticket shall be drawn in week number twenty-seven and each subsequent week until the Queen of Hearts is revealed and the grand prize is awarded.

4) The participant(s) holding the winning ticket stub(s) shall be declared the winner(s) of each drawing and shall be entitled to “Search For The Queen of Hearts”.

5) All remaining tickets in the raffle drum or receptacle shall be defaced and discarded.

6) The transparent, locking cover securing the cards shall be opened by a licensed member in charge or assistant to the member in charge at the time of each drawing.

7) Each winner shall select one of the facedown playing cards, which shall be turned face up by a licensed member in charge or assistant to the member in charge. If that playing card is the Queen of Hearts, the holder of the winning raffle ticket selecting that card shall be awarded 60% of the Grand Prize Pool.

8) If the card selected is not the Queen of Hearts, that card shall be defaced by drawing a diagonal line across its face; the card shall be returned to the game board face-up; the transparent, locking cover securing the cards shall be locked; and that player shall be immediately awarded a cash prize valued according to the following schedule:

Card Drawn                             Payout Odds

Any 2, 3, 4, or 5                              At least 4 – 1

Any 6, 7, 8, or 9                              At least 6 – 1

Any 10, Jack, or King                   At least 8 – 1

Any Ace                                        At least 10 – 1

Any Joker                                     At least 15 – 1

Any Queen other than Hearts   At least 20 – 1

9) The weekly raffle drawings shall continue until a winner selects the Queen of Hearts.

10) When the Queen of Hearts is selected, the winning player shall be awarded the Grand Prize consisting of 60% of the Grand Prize Pool.

11) The licensee shall retain the remaining 40% of the Grand Prize Pool as raffle profit.

12) A sign shall be posted in all areas where the game is conducted and where tickets are sold stating that the total prize pool shall be comprised of sixty percent of sales; a listing of the payout odds specified above on cards valued Two through King (excluding the Queen of Hearts); and that forty percent of all ticket sales will be retained by the authorized organization as profit.

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