In the second article in our 990-T blog series, our expert advisors discuss the important distinction between qualified sponsorship payments and advertising income. Learn how the benefits provided to a business sponsor can affect whether revenue is subject to unrelated business income tax (UBIT), as well as key questions to consider for proper reporting.
Read the first blog to learn more about unrelated business income.
For tax-exempt organizations, having businesses supporting your cause can be a valuable revenue source, but not all support is treated the same for tax purposes. A key distinction is whether the payment is a qualified sponsorship payment or advertising income. That distinction can determine whether the revenue is subject to unrelated business income tax (UBIT).
What Is UBIT?
UBIT applies when a tax-exempt organization regularly carries on a trade or business that is not substantially related to its exempt purpose. While many nonprofit revenue streams are exempt from UBIT, certain promotional arrangements may fall within this category.
Qualified Sponsorships
Qualified sponsorships are generally not UBIT. They are usually given to an organization by a business to support the exempt organization’s activities, with the business receiving only acknowledgment and no substantial benefit in return. These sponsorships often appear at fundraising events, such as galas and golf tournaments.
Typical sponsor acknowledgments may include:
- Use of the sponsor’s name, logo, or product lines
- Listing the sponsor’s address, website, or phone number
- Simple descriptions of the sponsor’s products or services
- Displays or distribution of the sponsor’s products at an event
These types of acknowledgments generally do not create UBIT, as long as they do not cross the line into advertising. For reporting purposes on Form 990, they are treated as contributions.
Advertising Income
Advertising income may be UBIT because it typically involves the organization providing the payer with a benefit beyond signage and acknowledgment. Some organizations print periodicals that generate advertising income for their organization.
Advertising usually includes:
- Qualitative or comparative language
- Price information or savings claims
- Endorsements
- Calls to action, such as “Buy now,” “Visit today,” or “Call for a free quote”
For example, saying “Thank you to ABC Bank for its support” is generally acknowledgment. Saying “ABC Bank offers the best rates in town—open your account today” is advertising and may result in unrelated business taxable income.
UBIT activity is reported on Form 990-T and its related Schedule A, Part IX. Advertising income can be offset by allocating advertising expenses, such as direct advertising costs by periodical, readership costs, and compensation of officers. If net income from UBIT exceeds the $1,000 exemption, the organization will be taxed on that income at the corporate tax rate of 21%.
Why the Difference Matters
There are instances when the same payment can be partly excluded from UBIT and partly taxable, depending on what the sponsor receives in return. If an organization offers promotional benefits that go beyond acknowledgment, the portion of the payment attributable to those benefits may be treated as advertising income.
Key Takeaways
Further questions should be asked whenever you see the words “sponsorship” or “advertising” in revenue accounts. Clients may also be unaware of how sponsorship income is treated for tax purposes, so providing a simple explanation of the key differences can help ensure proper reporting.
Include questions like the following in your client conversations:
- What did the sponsor receive in return for the payment? Or how did your organization acknowledge them?
- What benefits beyond acknowledgment did the sponsor receive, such as booth or exhibit space, mailing lists of attendees, speaking opportunities, social media promotions, etc.?
If you’re not sure how to move forward, feel free to contact a member of the Nonprofit Tax Team. We are here to help!
