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Competitions and Contests — Legal and Practical Considerations

Competitions, contests, drawing, raffles, auctions — all are frequently used tools in a nonprofit organization’s fundraising arsenal. What we may forget, though, is that both the IRS and state governments have laws and regulations applicable to these types of activities, which must be considered before launch. In addition, like campaigns or other fundraising initiatives, there are practical considerations to be addressed to ensure your efforts achieve the desired results.

The benefits of competitions, contests, drawings, raffles and the like include:

  • ability to reach new markets, raise visibility, create excitement
  • tapping into a revenue source other than philanthropy
  • for competitions, the opportunity to seek new ideas or creative input to address issues related to the organization’s mission

Challenges to watch out for include:

  • need for comprehensive, explicit rules, which you cannot change midstream
  • ability to publicize to the right audience to ensure your pool of entries will achieve your desired goal
  • no ability to cancel
  • requirement that all prizes be awarded, regardless of ultimate quantity or quality of entries
  • requirement of a public benefit (i.e., fundraising for your charitable mission or the development of a response to an issue of broad consequence)
  • conflicts of interest between competition applicants and judges
  • limitations on employee and related party participation

Rules relating to contests and competitions, where winners are selected based on merit or skills based criteria, and raffles or drawings, where winners are selected based on chance, will be subject to different rules and regulations by state and local governments. Those rules and regulations can include required disclosures, as well as registration and reporting requirements.

If your organization wants to consider a contest, competition, drawing or other event of this type, be sure to allow three to four months for planning. Also be sure to include a marketing and communication strategy, as well as clear goals and objectives for your event.

McKinsey and Company authored an excellent article on competitions and philanthropic prizes, which we commend to your reading. You can find it by clicking here.

For a good analysis of the considerations behind charitable auctions, check out this article from Blue Avocado, a magazine of the Nonprofits Insurance Alliance.

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Why you need a great accountant on your nonprofit team

We’ve talked about the benefits of the advice of a savvy accountant for a for profit business, but nonprofits need a great accountant on their team, too. Why would a nonprofit need an accountant if they don’t need to pay taxes? Why, to keep you from needing to pay taxes, of course!

Nonprofits are exempt from taxes in general, but there are some exceptions. Nonprofits can also be subject to penalties from noncompliance with various IRS rules and pronouncements. Here are some things you should be thinking about:

  • Are you conducting any activities that could generate unrelated business income, which is taxable even to a nonprofit (think gift shops and snack bars, depending on the type of organization you have)
  • Are you following all the IRS rules about acknowledging contributions correctly
  • Are you accepting gifts of art work, cars, boats or other unusual property
  • Are any of the gifts you receive restricted by your donors for a specific project or purpose
  • Have you classified your employees properly as either employee or independent contractor, and can you tweak the way any staff members work to reduce your employer tax responsibility
  • Do any of the fringe benefits you offer your employees end up creating taxable income to you (yes, that actually can happen)
  • Has anyone given you an interest in a partnership as a gift
  • Are you making grants directly to individuals, or grants to individuals or entities outside the US

These are just some of the things that can cause a nonprofit to be subject to tax or penalties if not dealt with properly, and not all of them are common sense. Whether or not you’re required to produce audited financial statements, make sure you have an accountant on your team that can help you review these and other financial practices outside of the routine context of completing your 990.