Revenue from advertising the goods and services of another organization is generally unrelated business income (UBI) to a tax-exempt organization, reportable on Form 990 and Form 990-T. However, identifying and acknowledging a generous donor should not turn Contribution Revenue into Advertising Income as long as certain rules are followed. Where is the line between acknowledging a sponsor and promoting their products?
Advertising is a payment from an outsider in which the outsider receives a substantial return benefit. An advertisement:
• Promotes or encourages the use of the trade, business, service, facility, or product of the payor
• “Visit today and check out their fine selection of tires”
• Contains qualitative or comparative language
• “Offering the finest selection of tires in town”
• “Offering the largest selection of tires in town”
• Offers an endorsement
• “Preferred provider for all your automotive needs”
• Provides price information or indications of savings or value
• “Home of the ‘Buy 3 Get 1 Free’ Special”
• “Show your ticket stub for a 10% discount”
In most cases, a tax-exempt organization will treat advertising revenue as unrelated business income subject to taxation (UBI) unless the activity is not regularly carried on or if it is directly related to the accomplishment of the exempt purpose (for example, a student newspaper where selling ads is part of the training).
Qualified Sponsorship Payments (QSP)
A sponsorship is a payment from an outsider to a nonprofit organization in which the outsider receives no substantial return benefit. The sponsorship acknowledgement may include:
• Recognition as a sponsor, including “Exclusive” sponsor
• Name, address, phone number
• General description of product or services
• “Retailer of bathroom fixtures”
• Visual depictions of products or services
• “The Ultimate Driving Machine”
• Display or distribution of products
A sponsorship payment is usually treated as contribution revenue by the nonprofit organization. Charitable organizations should provide a written acknowledgement to sponsors who give over $250. The acknowledgment should specify the value of any benefits that were provided to the donor in connection with the payment, including event tickets, goods, services, and advertising. Benefits other than advertising may be disregarded if the value is less than 2% of the sponsorship payment.
Certain payments to a nonprofit organization may not qualify as a QSP, yet they are not necessarily advertising.
• Exclusive provider arrangements
• In return for a payment from ABC Cola, XYZ Cola will not be allowed for sale
• Payment for the provision of goods or services, use of facilities, or other privileges
• Payments that are contingent on the level of attendance
• ABC Cola will pay $x,000, but only if at least 5,000 people attend the event
• Payments for the use of the logo, trademark, mailing list, or other intangible assets
Such payments may be classified as contractual services or royalties on Form 990 and may or may not be UBI reportable on Form 990-T depending on the facts and circumstances.
Additional guidance may be found at the IRS website.
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