14 Jul Is Your Non-Profit Subject to UBIT Tax on its Sponsorships & Advertising?
Your non-profit may prefer to avoid activities that subject it to unrelated business income tax (UBIT). But if you accept advertising or sponsorships that are not 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 is important to have a basic understanding of what is and what is not potentially taxable.
Qualified Sponsorship Dollars: Not Taxable
Sponsorship dollars generally are not 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 non-profit in return for the payment. The IRS allows exempt organizations to use information that is 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 does not 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 — does not automatically disallow a payment from being a qualified sponsorship payment. Generally, if the privileges provided are not what the IRS considers a “substantial benefit,” or if providing them is a related business activity, the payments will not 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 is 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. In addition, if your non-profit distributes or displays a sponsor’s product at an event, whether for free or remuneration, it is 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 non-profit to UBIT.