Deductibility of Gambling Fund Transfers

Exempt 501(c)3 and 501(c)4 festival organizations may deduct gambling fund transfers on their Unrelated Business Income Tax (UBIT) return if they meet specific guidelines.

Guidelines

If you are licensed to conduct lawful gambling, you may spend profits from gambling proceeds on lawful purpose expenditures (donations).

You may donate to yourself. These donations—in the form of transfers from your gambling account to your general account—are deductible as business expenses on your UBIT return under Internal Revenue Code, section 162. However, you are only allowed to deduct the amount of the transfers that were either:

• Spent by the end of your fiscal year, using the cash basis of accounting
• Incurred within your fiscal year, using the accrual basis of accounting

The transfer of funds from your gambling account to your general account is not deductible until you spend the funds to further your exempt purpose and the expenses have to be directly attributable to the transferred funds. In the case of either a cash basis taxpayer or an accrual method taxpayer, the transfer from the gambling account and subsequent deposit in the general account must precede any payment of expenses from the general account to be deductible as business expenses.

The transfer and the expense must occur in the same fiscal year to be deductible.

Transfer Examples

Example 1

Organization A (cash basis) transferred $10,000 from its gambling account to its general account at the beginning of its fiscal year. This organization has until the end of its fiscal year to spend $10,000 on general fund expenses. If the entirety of the $10,000 that was transferred at the beginning of the year is spent by the end of the year, the organization can claim the full $10,000 transfer amount on the UBIT return.

Organization B (cash basis) transferred $10,000 from its gambling account to its general account in the last week of its fiscal year. Like Organization A, they have until the end of its fiscal year to spend $10,000 on general fund expenses. If this organization does not spend all of the $10,000 transfer within the final week of its fiscal year, the organization cannot claim the full $10,000 transfer amount on the UBIT return. In this instance, the organization can only claim the portion of the $10,000 transfer that was spent after the transfer was made and before the fiscal year end.

Example 2

Organization C is saving to purchase an asset. The organization transfers $50,000 in year one from its gambling account to its general account. They do not spend the $50,000 in year one. The organization cannot claim this transfer as an expense on the UBIT return. The organization can continue to save money for the asset but must not include the unspent transfers as business expenses on the UBIT return.

In year two, the organization transfers $40,000 from its gambling account to its general account at the beginning of its fiscal year. The organization purchases an asset for $90,000 before year two’s fiscal year end. In year two, the organization can claim the entirety of the $40,000 transfer.

The transfer from year one is not eligible as a business expense on the UBIT return because the transfer was not made in year two. For transfer expenses to be deductible on the UBIT return, both the transfer and expense must occur during the fiscal year (cash basis). For accrual basis organizations, the transfer must be made and the expense must be incurred during the fiscal year.

Example 3

Organization D (accrual basis) transfers $70,000 from its gambling account to its general account to prepay for an expense by its June fiscal year end. However, the expense was incurred in October, November, and December following its fiscal year end. The $70,000 is not deductible as an expense because the expense was not incurred by its fiscal year end.