Gambling Fund Transfers deductibility on Form 990-T

Your organization’s lawful gambling fund is having a record year. Business is booming, everything is looking up until you realize the increase in profits will cost you an absurd amount in income taxes at year-end. You have two months until year-end and would do anything to bring those profits down to reduce the income tax subject to pay. Below will provide criteria in which general fund transfers can reduce your organization’s income tax on Form 990-T. 

Business Expense Deductions

Gambling fund transfers (i.e., donations from the gambling account to the general account) are deductible as business expenses on the Form 990-T, under the Internal Revenue Code, Section 162. However, the mere transfer of funds from gambling to general does not constitute a “lawful purpose expenditure” that is fully deductible under the code. 

Not-for-profit Accounting Balance Sheet

On October 15, 2020, the Minnesota Department of Revenue issued guidance related to the deductibility of gambling fund transfers on a not-for-profit’s Form 990-T. Under this guidance, in order for the transfer to be fully deductible, the general fund has to either spend the funds by the end of the fiscal year, using cash basis accounting, or incur the expenses within the fiscal year using accrual basis accounting, based on the method of accounting of the organization on the Form 990. It’s important to remember transfers may not be used to reimburse the organization for expenses previously incurred.

Examples:

Cash Basis

A cash basis organization transferred $50,000 from the gambling fund to the general fund in the last month of the fiscal year. The organization has until the end of the fiscal year to spend (i.e., check written/cash out the door) the $50,000 on general fund expenses to qualify the funds for deductibility on the Form 990-T. Any funds not spent by the end of the fiscal year will not be allowed for deduction on the Form 990-T. For transfers to be deductible on the Form 990-T, both the transfer and the payment for the expense must occur during the fiscal year. 

Accrual Basis

An accrual basis organization transferred $50,000 from the gambling fund to the general fund in the last month of the fiscal year. The transfer was made with the intent to buy large equipment. The organization has until the end of the fiscal year to incur general fund expenses to qualify the funds for deductibility on the Form 990-T.  The organization enters into an agreement with a vendor to purchase the equipment on the last day of the fiscal year, with payment due at delivery. In this example, the full $50,000 transfer may be deducted on the Form 990-T, since both the transfer was made, and the expense was incurred during the fiscal year.

Tax Planning

To ensure your organization can deduct these transfers and avoid paying taxes, plan ahead by either making the transfers as early as possible during the fiscal year or directly paying the general fund’s program expenses whenever possible. 

For additional considerations, please reach out to Sam Broman, CPA or contact our Assurance Services Team at Mahoney.