Now that we’re in a new year, it’s tax season and individuals and businesses alike will be doing their taxes — whether they like it or not. But for nonprofit performing arts organizations, that task may not be as straightforward as it seems. With many such organizations bartering program book advertising, it is important for them to realize the difference between advertisements and qualified sponsorship payments. Although there is a fine line distinguishing the two from each other, it can become a big deal if the IRS ever audits the organization.
Advertisements include inducements to purchase particular products or services, often containing information about value or pricing. With a nonprofit, such advertisements are often considered to be business activities that are unrelated to the nonprofit’s exempt purpose. That results in any net income generated from the advertisements to be subject to the unrelated business income tax (UBIT). Even if the bulk of the publication is about the organization’s exempt purpose — in this case, the performing arts — any advertisements would still be considered unrelated and subject to any applicable UBIT. However, a key part of the definition of an advertisement is that it is regularly carried on, so a publication about a one-time event, such as a fundraising gala, would likely not be considered as regularly carried on, and thus the income generated in such instances should not be subject to UBIT.
Qualified Sponsorship Payments
A qualified sponsorship payment (QSP) is a payment made to a nonprofit by an individual or company without an arrangement or expectation that the payer will receive a benefit in return. The nonprofit may provide minor benefits in return for the QSP, such as acknowledgment of the sponsorship through use of the donor’s name or logo, or providing goods or services of inconsequential value. If the nonprofit does provide acknowledgment of the sponsorship, it may not be done in conjunction with or as endorsement of any of the donor’s goods or services. The acknowledgment, however, can include information such as locations where the donor can be found, as well as contact information and associated logos and slogans. And the content of the information should be controlled by the nonprofit, not by the donor.
There is one important exception to the QSP, which is in printed materials. If payment for an acknowledgment of a donor’s name or logo is in a nonprofit’s printed periodical, it would be treated as an advertisement for tax purposes, even if it would be considered a QSP in a different medium.
When Advertisements and QSPs Converge
Sometimes, a payment can qualify as both an advertisement and a QSP, such as if a company’s logo is used for both a one-time event and a regularly published publication. In such an instance, the IRS treats the single payment as two separate payment, and the UBIT is only applied to the portion of the payment that represents fair market value of the advertisement part of the payment, so the portion of the payment that qualified as a QSP would not be subjected to the UBIT. Although the IRS will treat that single hybrid payment as two, it may be in the nonprofit’s best interest to treat it as two transactions itself, to make it more clear to the IRS how much of it was applied to the UBIT and how much was not, preventing potential confusion — or worse — down the road.
These are guidelines to follow when determining what is an advertisement and what is a qualified sponsorship payment in regards to the unrelated business income tax, but it is not a comprehensive guide to the situation. So we recommend checking out the official IRS publication about UBIT and consulting your tax professional to get the latest information as it pertains to your specific organization. You can also avoid “crossing this line” with trades by utilizing the services of a professional program book publisher like Onstage Publications. Good selling!