Do you know if corporate sponsorships are taxable or what activities are considered advertising? Like many not-for-profits your organization may supplement its usual income-producing activities with sponsorships or advertising programs.
Although your nonprofit is allowed to receive payment they are subject to unrelated business income tax (UBIT) unless the activities involved are substantially related to your organization’s tax-exempt purpose or meet another specific exemption. So it’s important to understand the possible tax implication of income from sponsorships and advertising.
What is sponsorship?
Qualified sponsorship payments are those made by a person – that is, a sponsor – engaged in a trade or business with no arrangement or expectation of receiving any substantial benefit from the nonprofit in return for the payment. Sponsorship dollars aren’t taxed.
In recent years, the IRS has liberalized rules pertaining to sponsorships. It now allows exempt organizations to use information that is an established part of a sponsor’s identity, such as:
- Telephone number, and
- Internet addresses
For example, an exempt health-related organization can recognize a hospital sponsor by displaying the hospital’s logo and tag line, “Smart Medicine, Better Care,” on signs and literature at a health fair. The hospital’s payment would be considered a qualified sponsorship and, therefore, not subject to UBIT.
What are the exceptions?
Beyond the general description of qualified sponsorship payments above, some exceptions occur. The IRS doesn’t consider these instances to be sponsorship if the payment amount:
- Is contingent upon the level of attendance at an event, broadcast rating or other factors indicating the quantity of public exposure received, or
- Entitles the payer to the use of acknowledgment of the business name, logo or product lines in an organization’s periodical, defined as a monthly journal or other regularly printed material. (It doesn’t include material that is primarily distributed in connection with a specific event conducted by an organization, such as an event brochure.)
In addition, providing facilities, services or other privileges to a sponsor – such as complimentary tickest or admission to golf tournaments – doesn’t automatically disallow a payment from being a qualified sponsorship payment. Generally, if the privileges provided aren’t what the IRS considers as “substantial benefit” or if providing them is a related business activity, the payments won’t be subject to UBIT.
But when services or privileges provided by an exempt organization to a sponsor are deemed to be substantial, part or all of the sponsorship payment may be taxable. The determination of what is “substantial” can be complicated, so it’s best to ask your tax advisor about it.
What is advertising?
As the name suggests, advertising involves an exempt organization advertising a sponsor’s products or services. Payment for this benefit is considered unrelated business income, so it’s subject to tax. According to the IRS, advertising includes:
- Messages containing qualitative or comparative language, price information or other indicatons of saving or value,
- Endorsements, and
- Inducements to buy, sell or use products or services.
Activities are often misclassified ad advertising. As previously noted, using logs or slogans that are an established part of a sponsor’s identity is not, by itself advertising.
And when a nonprofit distributes or displays a sponsor’s product at anevent, whether for free or remuneration, it is considered use or acknowledgment, no advertising.
Let’s look at an example. Suppose an exempt performing-arts organization accepts a sponsorship payment from a store that sells musical instruments and related items. The arts group notes on its website, next to information about upcoming performances, that the music store is a sponsor and posts a link to the store’s website.
Because there was only the link between the two organizations – and no language exhorting patrons to buy the store’s products – the payment from the music store to the orgs nonprofit is considered sponsorship, not advertising.
How can you be sure you’re within the rules?
As with most tax matters, the rules pertaining to qualified sponsorships, advertising and related business income are complex and contain numerous exception and situation-specific determinations.
So you’ll want to treat carefully and seek professional advice in sorting through the sometimes-blurry distinction between nontaxable sponsorships and taxable advertising. Your accountant can develop guidelines specific to your organization’s activities in this complex area.