When are sponsorship and advertising payments subject to tax?
Sponsorship and advertising dollars can provide a real boost to your not-for-profit organization’s income. However, if sponsors or advertisers receive a “substantial benefit” or if providing benefits isn’t a related business activity, you may owe unrelated business income tax (UBIT) on the payments. Here’s a quick look at what is and isn’t taxable.
UBIT typically doesn’t apply to sponsorships
Sponsorship dollars generally aren’t taxed. Qualified sponsorship payments are made by a person engaged in a trade or business with no arrangement to receive — or expectation of receiving — a 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 exceptions. For example, if a 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. Therefore, the payment would likely trigger 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 usually does apply to advertising
Payment for advertising a sponsor’s products or services is generally 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.
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Recognizing the difference between taxable and nontaxable payments can be challenging. Be sure to contact us if you’re soliciting support from possible sponsors and advertisers and aren’t sure what crosses the tax line.
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