Our Golf Pro clients often contact with questions about raffles. Accounting for raffles can be confusing and complicated. But if you handle it incorrectly, you could have problems with the IRS or with your state tax authority.
Questions Golf Pros often ask are, at the time of the raffle . . .
· Are the raffle proceeds income?
· Are sales taxes applicable?
The answers are No, but read on.
The raffle proceeds are similar to issuing a gift certificate and or club credit to be redeemed at a future time. Even though no money changes hands later at the time of the redemption, the merchandise sold with these credits are subject to state sales tax at that time.
Still confused? Here’s an example. Assume the following:
- You run a raffle and sell 500 tickets at $10 each. Your total proceeds are $5,000.
- Your business entity/LLC invoices the club for the $5,000
- You put that amount on the balance sheet as a liability to be transferred to income when the credits are redeemed.
In most cases raffle winners must redeem their merchandise by December 31 or the credits expire and at that time should be picked up as income.
There is no sales tax liability until the raffle credits are redeemed.
This is a summary of the accounting and tax steps:
- $5,000 raffle proceeds recorded as a liability on your balance sheet.
- $5,000 recorded as accounts receivable from your club. When the club pays you, the receivable is eliminated.
The raffle proceeds are recognized as income when the raffle credits are redeemed or at year end when they expire. It may be simpler to just record all proceeds as income at the end of the year rather than record the income as individual credits are redeemed.
This can be handled by you or your accountant in one journal entry at year-end.
At the time of the redemption the merchandise sold will be recorded through the point of sales system as a sale.
Sales tax due is recorded as a liability on the balance sheet as the raffle credits are redeemed for merchandise; this should happen automatically when the transaction is run through the point of sales system.
Here is a more detailed description of the steps:
- All raffle tickets sold
- Your club bills members who bought raffle tickets.
- You invoice your club for $5,000 which is recorded as a receivable from your club and a liability (to raffle winners) on your balance sheet.
July 22 – 31
- Members redeem $4,500 in merchandise leaving $500 unredeemed.
- Golf shop Point-of-sale system records transactions as merchandise sales
- The appropriate sales tax liability is calculated by POS system
- Point of sales system records transaction as club credit or gift certificate.
- Club pays your $5,000 invoice.
- Record $5,000 as payment of invoice and eliminate receivable from your club..
Any unredeemed credits, $500, are re-classed as income and reported as non-taxable income sales on the sales tax return being filed for that period.
As you can see, this is complicated. I encourage you to consult your accountant to confirm that you are handling raffles correctly.
I am happy to give any Golf Pro a complimentary 30 minute consultation on this subject or any other.