January 17, 2024 •HoganTaylor
Sponsorship and advertising dollars can significantly augment the income of your not-for-profit organization. However, it's crucial to understand when these funds might be subject to unrelated business income tax (UBIT). Let's delve into the nuances of what qualifies as taxable and what doesn't.
Sponsorships: Generally UBIT-Free, but Exceptions Exist
In most cases, sponsorship dollars are not taxed. Qualified sponsorship payments, made by businesses without an expectation of substantial benefits in return, are generally exempt from UBIT. The IRS allows exempt organizations to utilize certain sponsor information, such as logos, slogans, locations, phone numbers, and URLs, without triggering tax obligations.
Exceptions do apply. If a payment is contingent on factors like event attendance or broadcast ratings, the IRS may not classify it as a sponsorship, potentially triggering UBIT. Offering facilities, services, or privileges to a sponsor—such as complimentary tickets or admission to an event—doesn't automatically disqualify a payment from being considered qualified. However, if these privileges are deemed "substantial" by the IRS, it may result in taxable portions of the sponsorship payment.
Advertising: Usually Subject to UBIT
Payments received for advertising a sponsor’s products or services typically fall under unrelated business income, making them subject to UBIT. The IRS defines advertising broadly, encompassing endorsements, inducements to buy, sell, or use products, and messages containing qualitative or comparative language, price information, or other value indications.
Some activities commonly misclassified as advertising include using logos or slogans integral to a sponsor’s identity, which, on their own, do not constitute advertising. Distributing or displaying a sponsor’s product at an event, whether for free or compensation, is considered use or acknowledgment, not advertising.
Contact Us for Clarity
Differentiating between taxable and non-taxable payments can be challenging. If you are reaching out to potential sponsors and advertisers and are uncertain about the tax implications, don't hesitate to contact us. We can provide guidance to ensure your organization remains compliant with tax regulations while maximizing support.
Understanding the intricacies of taxation in the realm of sponsorships and advertising is crucial for nonprofit financial health. Stay informed, stay compliant, and let us help you navigate the complex terrain of nonprofit taxation.
How HoganTaylor Can Help
The HoganTaylor Nonprofit team of business advisors and CPAs is comprised of former CFOs, controllers, and industry experts with extensive experience providing the guidance organizations need to lean forward again in their leadership. If you have any questions about this content, or if you would like more information about HoganTaylor’s Nonprofit practice, please contact Jack Murray, CPA, Nonprofit Practice Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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