Many non-profits supplement their usual income-producing activities with sponsorships or advertising programs. Although you are allowed to receive such payments, they are subject to unrelated business income tax (UBIT) unless the activities are substantially related to your organization’s tax-exempt purpose or qualify for another exemption. So, it is important to understand the possible tax implications of income from sponsorships and advertising.

What is sponsorship?

Qualified sponsorship payments are made by a person (a sponsor) engaged in a trade or business with no arrangement to receive, or have an expectation of receiving, any substantial benefit from the non-profit in return for the payment. Sponsorship dollars are not taxed. The IRS allows exempt organizations to use information that is an established part of a sponsor’s identity, such as logos, slogans, locations, telephone 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.

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. However, 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.

What is advertising?

Payment for advertising a sponsor’s products or services is considered unrelated business income, so it is subject to tax. According to the IRS, advertising includes:

• Messages containing qualitative or comparative language, price information, or other indications of value
• Endorsements
• Inducements to buy, sell, or use products or services

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. Further, 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.

Complex rules

The rules pertaining to qualified sponsorships, advertising, and unrelated business income are complex and contain numerous exceptions and situation-specific determinations. Contact us with questions.