Your not-for-profit may prefer to avoid activities that subject it to unrelated business income tax (UBIT). But if you accept advertising or sponsorships that aren’t substantially related to your tax-exempt purpose, you may unwittingly expose your organization to UBIT liability. The rules governing these types of support are complicated, so it’s important to have a basic understanding of what is and what isn’t potentially taxable.
Qualified sponsorship dollars: Not taxable
Sponsorship dollars generally aren’t taxed. Qualified sponsorship payments are made by a person (a sponsor) engaged in a trade or business with no arrangement to receive — or expectation of receiving — any substantial benefit from the nonprofit in return for the payment. The IRS allows exempt organizations to use information that’s an established part of a sponsor’s identity, such as logos, slogans, locations, phone numbers and URLs.
There are some exceptions. For example, if the payment amount is contingent upon the level of attendance at an event, broadcast ratings or other factors indicating the quantity of public exposure received, the IRS doesn’t consider it a sponsorship and the payment would likely trigger UBIT.
Providing facilities, services or other privileges to a sponsor — such as complimentary tickets 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 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.
Advertising payments: Taxable
Payment for advertising a sponsor’s products or services is considered unrelated business income, so it’s subject to UBIT. According to the IRS, advertising includes endorsements, inducements to buy, sell or use products, and messages containing qualitative or comparative language, price information or other indications of value.
Some activities often are misclassified as advertising. Using logos or slogans that are an established part of a sponsor’s identity is not, by itself, advertising. And if your nonprofit distributes or displays a sponsor’s product at an event, whether for free or remuneration, it’s considered use or acknowledgment, not advertising.
Distinctions between taxable advertising and nontaxable sponsorships can be nuanced. So before you seek new income sources, contact us for help determining whether they may subject your nonprofit to UBIT.