Sponsorship and advertising dollars can significantly increase the income of your nonprofit. However, if sponsors or advertisers are provided a “substantial benefit”, or if providing perks is not a related business activity, you may be required to pay unrelated business income tax (UBIT) on the payments. Here’s a rundown of what is and isn’t taxable.
UBIT Doesn’t Usually Apply to Sponsorships
Sponsorship money is normally not taxable. Qualified sponsorship payments are paid by a person engaged in a trade or business with no arrangement or expectation of receiving a significant benefit from the organization in exchange for the contribution. Exempt organizations are permitted by the IRS to use material that is an established component of a sponsor’s identity, such as logos, slogans, addresses, phone numbers, and URLs.
There are a few exceptions. For example, the IRS does not consider a payment to be a sponsorship if the amount is dependent on the number of people who attend an event, television ratings, or other factors reflecting the amount of public exposure received. As a result, the payment would almost certainly result in UBIT.
Providing facilities, services or other privileges to a sponsor (such as complimentary tickets to a concert or admission to a golf tournament) doesn’t automatically disallow a payment from being considered qualified. If the privileges provided aren’t what the IRS considers a “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.
UBIT Frequently Applies to Advertising
Payment for advertising a sponsor’s products or services is often regarded as unrelated business income, and thus is subject to UBIT. The IRS defines advertising as endorsements, inducements to buy, sell, or use products, and messages that contain qualitative or comparative language, price information, or other indications of value.
Some activities are frequently mislabeled as advertising. Using logos or slogans that are already part of a sponsor’s identity is not advertising in and of itself. If your nonprofit distributes or displays a sponsor’s products at an event, whether for free or for a fee, it is deemed use or acknowledgment rather than advertising.
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It can be difficult to distinguish between taxable and nontaxable payments. If you’re soliciting help from potential sponsors or advertisers and aren’t sure what crosses the tax line, contact us.
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