Presentation on theme: "UCSD Development Training October 2012. Training Agenda Why Is This Important? Common Definitions Event Elements/Issues Tickets Sponsorships and Underwriting."— Presentation transcript:
Why is this important? Many new Development Officers and staff Development is responsible for knowing UC policies Ditto: IRS Regulations (Yes - Ugg!) Need to manage volunteer expectations, ideas, and demands vis-a-vis these policies and regulations Protect UCSD and UC San Diego Foundation by complying with charitable regulations and UC policy Inform donors so there are no surprises and a we have a happy outcome!
A conveyance or transfer of an asset (including cash or negotiable instruments) given with charitable intent and without consideration – (legal definition). Necessary components: charitable intention, not an equal exchange, given irrevocably, release of control GIFT
TAX DEDUCTIBLE GIFT Given to a bonafide charity recognized by the IRS Cannot be given to individuals, and cannot be given to a charity as restricted for individual for personal benefit. Cannot be given to an entity that is not legally recognized as a tax exempt charity by the IRS. Can be restricted for a specified charitable purpose Quid pro quo portion of a gift is not tax deductible
QUID PRO QUO Quid pro quo is essentially defined as an even exchange or equal value recieved. In the case of charitable events, it means some portion of the funds given represents value received in exchange for a price paid. There can be a quid pro quo component to a gift, but and that portion will not be tax deductible.
Typical Event Elements - Overview Tickets or table purchased to attend A price for tickets or tables that includes the value of the benefits received as well as a donation component. Event sponsorship/underwriting at levels Vendors that provide things for free or reduced costs Auctions and Raffles – Items given to UCSD to use as auction items or raffle prizes, AND The sales proceeds from the auction sale or raffle ticket sales. Vendors that want to sell things then gift a portion of the sales revenue. All of these require some disclosures to the donors so there are no surprises!
Event Elements – Donor Disclosures Value of each event venue per ticket or table must be determined by Development using the price a person would have paid for it on the outside, exclusive of discounts. In IRS terms – the Fair Market Value of what is being given to the donors must be clearly disclosed in advance. Similarly, if any sponsors or underwriters receive packaged benefits in exchange for their funds, those benefits must be valued and will reduce their deduction and must be disclosed in advance. Gift Processing needs to know these amounts and must receipt accordingly.
Event Elements – Donor Disclosures Vendors that provide goods or services for free or reduced costs must be advised that their donation will probably have limited deductibility for tax purposes – the IRS does not recognize lost revenue/profit. Auctions and Raffles – For items given to UCSD to use as auction items or raffle prizes; donors need to provide a FMV for the items– as this must be used as required disclosure prior to the sale of the item. Development needs to verify the value provided is reasonable.
Event Elements – Donor Disclosures Sales proceeds from auctions or raffle ticket sales: no deductibility for the price of a raffle ticket usually no deduction for the price paid for an auction item (unless the amount paid exceeds the FMV of the item) And…finally, in raffles – all must be registered with the State to be legal and some winnings may be taxable winnings that we have to collect tax on. WHEW! ( We know!)
Event Tickets Often have a Quid pro quo component– defined as value received (get what you pay for) IRS rules: the charity is responsible to specifically disclose, at the time of solicitation, the fair market value (FMV) of any benefits a donor receives in exchange for a gift. Special events are notorious for this: meals, entertainment, drink, valet, music, etc. The cost to the charity of providing these items to the charity is not necessarily a measure of FMV, especially if the costs were underwritten by a vendor. The charity must disclose the FMV of the benefits, which is not a tax deductible gift, in advance, on invitations, flyers, etc.
UCSD Ticket/Table Disclosure Example The price of each ticket, less $140, or $1400 per table, is tax deductible as a charitable donation Or: $140 per ticket, or $1400 per table, represents the value of the benefits received; the balance is a charitable gift
Sponsorships SPONSORSHIP Sponsorships come in two forms: where commercially valuable benefits such as significant advertising of the sponsor and their products are returned to a sponsor by the donee entity, the sponsorship is considered business income to the donee entity and advertising or marketing expense to the sponsor (that is, not a gift). Such income may be subject to Unrelated Business Income Tax (UBIT) by the donee.
Sponsorships SPONSORSHIP (contd) Where only incidental benefits are returned to a sponsor by the donee entity, such as use of the sponsors name or logo for donor acknowledgment, and when less than 2% the sponsorship paid is returned in value of goods or services to the sponsor, then the sponsorship is a qualified sponsorship to the donee entity, is not subject to UBIT, and is a defined as a GIFT under University policy and IRS regulations. Most of our Development-related events have sponsorships that would be defined in this vein. They are thought of as…
Underwriting EVENT UNDERWRITING Generally a gift provided to assist UCSD in putting on an event May be cash or be the value of free services or goods from a vendor If cash, underwriting is treated as a charitable gift, as long as the benefits returned to the sponsor fall under the 2% rule. Benefits, in the form of event tickets, etc, may be provided in return to the underwriter, as quid pro quo, and will be receipted accordingly. Value of goods and services provided should be acknowledged and celebrated, but usually are not a gift (or the gift is greatly reduced as it is limited to out of pocket costs). Must disclose the values of the benefits on the sponsorship form when solicited.
Auctions Auctions involve a good amount of necessary organization and paper trail. They have two components: 1. Incoming gifts in kind from donors (the items to be auctioned off): Some items are recorded as private support and receipted as gifts, such as tangible personal property Other items, such as free services, free uses of facilities or homes etc, or free meals, are lost income to the provider and are not receipted or recorded, but are still accepted for as an auction item. All should be acknowledged by Development, using care to not imply a tax deductible gift if there is not one.
Auctions, cont. 2. Items Auctioned Off: Must be listed with a fair market value at the auction with written disclosures related to the amount that will qualify as a tax deductible gift if purchased. IRS RULE: Anything paid under or at the FMV of the item represents equal value received or quid pro quo, meaning that portion is not a gift and not tax deductible. (this is the usual outcome) Anything paid in excess of the FMV of the item is receipted as a gift and tax deductible. (a rare outcome)
Raffles and Opportunity Drawings What constitutes a raffle versus an opportunity drawing? What are the State of California charitable raffle regulations and filing requirements? What are the federal and state tax reporting and withholding regulations for certain winnings – raffle or opportunity drawing? Raffle/Drawing checklist and forms.
What is a Raffle? A raffle occurs when tickets are sold for a price, in exchange for the right to win a prize. Charitable raffles in the State of California are now legal Must be in compliance with state law as well as state and federal income tax law. Raffle ticket purchases are not tax deductible as a charitable donation since they represent the purchase of a chance to win; they are considered 100% quid pro quo (equal value received). Purchasers of the tickets must be advised, by clear disclosure on the ticket and in advertisements, that there is no tax deduction for the ticket price paid. (But the uses of the proceeds for charitable purposes can be stated).
Raffle Regulations Raffles are regulated under the CA Penal Code section 320.5 The UC San Diego Foundation (Foundation) files an annual registration statement with the State of CA which states our intent to hold raffles during the year (filing is Sept 1 through Aug 31 st ). In addition to filing an annual registration statement, an individual financial report for EACH raffle must be prepared and filed.
Raffle Regulations continued All raffles must comply with the 90/10 rule - 90% of the proceeds must go to the charity and only 10% of the proceeds may be expended for winnings or raffle related expenses. Therefore 50/50 raffles are illegal in California (meaning where 50% of the collected raffle ticket sales are given away as the prize). No raffle tickets can be sold over the internet! (The event website can only announce there will be a raffle). Tickets can be sold by mail.
Raffle Regulations, continued Purchases of prizes or cash awards given from the proceeds of the raffle ticket sales will probably not meet the 90/10 rule. Prizes need to be donated as gifts in kind, or if purchased, an entirely different source must be used (not recommended). IMPORTANT: all raffles must to be registered under the UC San Diego Foundation. Per UCOP directive, raffles cannot be registered in name of The Regents. Therefore, the proceeds need to be to the UC San Diego Foundation.
Raffles – Development Role A financial report of the raffle proceeds and costs be prepared for each raffle by the department holding the raffle. We must rely on Development to compile this information and excellent record keeping is necessary. The report filed with the State for each raffle has a section of true/false certifications that must be answered and signed by the CFO of the UC San Diego Foundation. YIKES! The certifications are, essentially, the requirements for conducting a raffle in accordance with State law; therefore, it is important that the Development officer, department representatives and volunteers understand the law before a raffle is held.
Opportunity Drawings The State stipulates that you can hold an opportunity drawing (and not have to file with the State) if all of the following are true: The tickets are given away and provide the chance to everyone to win a prize - a general and indiscriminate distributing of the tickets. The free tickets are offered on the same terms and conditions as any additional tickets for which a donation is offered. The scheme does not require any of the participants to pay for a chance to win and that fact is clearly advertised. Therefore, you must advertise in advance of the drawing that the drawing is free to anyone who wants to participate.
Opportunity Drawings If the drawing is an Opportunity Drawing, it only eliminates the responsibility to file a report to the CA State board of Equalization. It does NOT eliminate the responsibility to report and withhold taxes to the IRS on prize winnings depending upon the value of the prize. (More on that in a minute!)
Federal and State Income Tax Regulations on Winnings The IRS defines raffles and opportunity drawings as a form of a lottery. As such, a raffle generally refers to a method for the distribution of prizes among persons who have paid for a chance to win such prizes, usually determined by the numbers, or symbols, on tickets drawn. The winnings are therefore considered gambling winnings.
Federal Income Tax Regulations The IRS has BOTH 1) filing requirements and 2) tax withholding requirements for prizes/gambling winnings. Remember: only one ticket wins each prize, no matter how many each patron buys (this is a clue for something below!) Winner Reporting Requirements: If a single prize won is greater than 1) $600 in cash or FMV and 2) if the prize value is 300 times larger than the wager (the price for one raffle ticket), the Foundation is responsible for reporting the winner of the prize, their social security number and the value to the prize to the IRS.
IRS Winner Reporting -Example Example 1: Jane Triton buys 1 raffle ticket for $20. Her ticket wins the raffle and gets a prize worth $1,000. Test 1: The prize is over $600 in value Test 2: 300 times her ticket price of $20 is $6,000, less $20 paid, or $5980. Do we need to obtain her tax id information and report on her prize winnings to the IRS? NO, because the value of her prize was less than 300 times the price paid for her ticket. Example 2: Joe Triton buys 20 raffles tickets at $1 each for $20. One of his tickets wins the raffle and gets a prize worth $1,000. Test 1: The prize is over $600 in value Test 2: 300 times his ticket price of $1 is $300 Must we report on his prize winnings? YES, because the value of his prize was more than $600 and more than 300 times the price paid of his ticket.
Tax Withholding Requirements for Winnings Tax Withholding Requirements In addition to winnings reporting there may also tax withholding requirements. (UGG!!) Simply put, if the value of a prize is over $5,000 (net of the price of one ticket), we must withhold or collect taxes from the winner before they take possession of their prize, whether the prize was cash or non-cash. IMPORTANT - this criteria overrides the test of 300 times the value of a ticket.
Tax Withholding Requirements for Winnings Cash and Non Cash prizes – donor provides correct taxpayer number If the prize winner provides a correct taxpayer number (in most cases a social security number) a withholding tax of 25% must be withheld from the winnings (a complicated calculation) that assumes that tax is added to their winnings). The tax will be based on the cash value less the value of the wager. Example: Jane Triton purchases a raffle ticket for $100. She wins a cash prize of $6,000. Because the proceeds from her wager is greater than $5,000 ($6,000 less $100), we must withhold $1,966 in taxes from her prize and remit and report it to the IRS. ($5,900 divided by.75 = $7,866 in the total with tax. $7,866 – $5,900 = $1,966 in tax due. We also have filing requirements. We must complete a W2-G form and have the prize winner sign it before we give them their prize.
IRS Tax Withholding Requirements for Winnings Cash and Non Cash prizes – donor does not provide correct taxpayer number If the donor does not provide a correct (or any taxpayer number) a backup withholding tax of 28% (as of Dec 2012) must be withheld from the winnings. Example: Jane Triton purchases a raffle ticket for $100. She wins a cash prize of $6,000. She will not provide us a social security number. Because the proceeds from her wager is greater than $5,000 ($6,000 less $100), we must withhold $2,274 ($5,900 divided by.72 = $8,194 is the total with tax. ($8,194 – $5,900 = $2,274 in tax) We want to avoid this - otherwise we will be filing out a lot of paperwork and having a lot of correspondence with the IRS!
IRS Tax Withholding Requirements for Winnings There also can be state tax withholding at 7% and more forms to file with the state! Fair Market Value is critical to determining the tax filing and withholding requirements for non- cash prizes. We must show we followed proper and reasonable efforts to determine the fair market value of non-cash prizes, and to document them in detail with sources (such as prices published on websites for services, rooms, dinners, etc, or on ebay if a tangible item, or by formal appraisal if a valuable item).
Summary Regarding Raffles Compliance: We must comply with State and Federal law when holding opportunity drawings or raffles. Raffles will always require a State of California filing. Disclosure: We need to disclose to donors that ticket purchases are not tax deductible and winning may be reportable to the IRS and taxed. There should be no surprises to winners. Reporting and Taxation: The reporting and tax computations are complicated and there are specific tax forms that must be collected from the prize winners at the raffle as well as other forms that must be remitted to the IRS within a designated time period. Advancement Services will be there to do this if the prize values qualify. Please ensure we are completely in the loop prior to the event
Best Practices It is probably best if no prize in a raffle or drawing is worth more than $5,000 to avoid the withholding requirements. Use care to determine if prizes worth $600 to $5,000 would invoke IRS reporting, avoid if possible. If any IRS reporting or withholding is possible, all ticket purchasers need to apprised in advance of the raffle. A staff member from Advancement Services should be in attendance at the event to obtain the required tax identification information from the winner and ensure the proper IRS reporting forms are completed. No winnings should be provided until these forms are completed, if required.
Use of External Vendors From time to time, a vendor will offer their goods for sale as a part of the event. This is usually in the form of items they hope to sell at your event – and they promise a portion of their sales proceeds back to UCSD as a gift. Whatever the deal is that is offered, use care and caution. Trust, but VERIFY! Look up internet reviews on the vendor – are they considered fair business folks or unfair, or worse - swindlers?
Use of External Vendors Ensure that the vendor is offering valid goods for sale if purported to be highly valuable originals, etc. Can you verify this? UCSD events are generally not to be used for the sale of goods by others. There may be unusual circumstances for such arrangements, and those should be discussed with Advancement Services prior to the event. If approved, an agreement with the vendor will need to be executed that articulates the amount UCSD will get, by when, and a minimum amount.
References It is critical that you have knowledge of the State and IRS regulations regarding quid pro quo values, auctions, raffles and opportunity drawings, and that your volunteers are aware of these requirements. As a prominent public charity, we take great care to be in compliance with the laws – this is not optional and your volunteers must understand this. Use the DO Toolkit, the GP website and the IRS Guides
References http://www.irs.gov/pub/irs-pdf/p1771.pdf AND http://www.irs.gov/pub/irs-pdf/p526.pdf
References Use the raffle/drawing checklist for your event. To learn about the state requirements for raffles, review FAQs and get filing forms go to: http://ag.ca.gov/charities/raffles.php http://ag.ca.gov/charities/raffles.php For IRS regulations see IRS Pub. 3079, Tax-Exempt Organizations and Gaming. http://www.irs.gov/pub/irs-pdf/p3079.pdf http://www.irs.gov/pub/irs-pdf/p3079.pdf