RAFFLES – ALLOWABILITY ISSUES
The NC General Statutes consider raffles as a form of gambling and are generally unlawful in the state of North Carolina. However, there is an exception that allows two raffles per year for each tax exempt non-profit organization (i.e. for each foundation). Additionally, the statutes stipulate that the maximum value that may be offered as a non-cash prize, other than real property, for any one raffle is $125,000, and the total of the non-cash prizes, other than real property, for the two raffles may not exceed $125,000 in total in any calendar year. The maximum cash prize that may be offered for a single raffle is $125,000, and the total for the two allowed raffles is also $125,000. Real property, with a value of up to $500,000, may be offered as a prize as well. The total value of real property allowed for the calendar year is also limited to $500,000.
RAFFLES – TAXATION ISSUES
The Internal Revenue Service (IRS) considers a raffle a form of a lottery. As such, it is not considered a charitable activity and is treated as taxable income to the winner(s). In order to comply with all IRS regulations, the Foundation has specific reporting obligations that it must meet.
VALUATION OF WINNINGS
The value of the winnings is considered to be the fair market value (FMV) of the winnings less the amount of the recipient’s wager (i.e. the cost of the raffle ticket). For non-cash goods or services that are to be raffled, a good faith estimate of the FMV must be obtained by documentation that validates the FMV of the good or service. The FMV is the amount for which the good or service would have been sold to a prospective buyer at that time. If the FMV of the good or service is deemed to be greater than or equal to $5,000, then the Foundation must obtain a qualified appraisal.
Raffle winnings are reportable to the IRS as gambling winnings if the value of the winnings is a) $600 or more, and b) at least 300 times the amount of the wager. Winnings less than $600 are also considered gambling winnings by the winner, however, the Foundation is not required to report these winnings to the IRS. It is very important that the Foundation obtain the name, address and social security number of the winner. This will provide the FAI office with the information needed to comply with IRS reporting requirements. Failure to obtain this information will subject the winner to a higher withholding tax rate, referred to as the backup withholding rate. FAI will report these winnings on IRS Form W-2G. A copy of this statement will be furnished to the winner by January 31st of the following year, and a copy will also be furnished to the IRS.
If the value of the winnings is greater than $5,000 the Foundation is required to withhold and remit income tax to the IRS. There are two options for payment of the required withholding tax – 1) the winner can pay the tax directly to the Foundation (or the amount can be withheld from the winnings if it is a cash prize), or 2) the Foundation can elect to pay the withholding tax on behalf of the winner. Each option is discussed below:
If the winner will be paying the tax:
Assuming that the winner has provided the proper information (name, address, and social security number) the withholding rate is 28% of the fair market value of the prize. If it is a cash prize, this amount can be withheld directly from the winnings. If it is a non-cash prize then the winner must remit an amount equal to 28% of the FMV directly to the Foundation. If the winner did not supply the necessary information then the withholding rate increases to 31%.
If the Foundation is going to pay the tax on behalf of the winner:
The tax must be paid not only on the fair market value of the winnings, but also on the tax itself. This results in a “grossed” up tax rate of 38.88% of the winnings. This will result in higher costs and the Foundation must provide the project number that these taxes will be paid from on the Raffle Winnings – Information Sheet.
WHAT TO DO
If the prizewinner is going to pay the withholding, please complete the Raffle Winnings – Information Sheet. Collect cash or a check from the prizewinner for the amount of the withholding tax due. The prizewinner should make the check payable to the Foundation. The prizewinner must alsofurnish his/her SSN and address. The prizewinner’s check, along with the Information Sheet should be forwarded to FAI by the 5th of the month following the raffle. FAI will deposit the prizewinner’s check and mail a check to the IRS for the withholding. FAI will also furnish a W-2G to the prizewinner by January 31st of the year following the raffle
If the foundation is going to pay the taxes for the prizewinner, please complete the Raffle Winnings – Information Sheet and forward to the FAI office. FAI will calculate the withholding amount and will remit to the IRS. We will also furnish a W-2 G to the prizewinner by January 31st of the year following the raffle.