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Advertising Income or Sponsorship Contribution?

It is often difficult to determine if the income from a sponsor should be considered advertising income (considered unrelated business income (UBI) and taxable, after appropriate deductions) or a contribution from a qualified sponsor, which is not taxable. In the past, the IRS tried to address the issue by focusing on the nature of the services provided by the organization rather than the benefit received by the sponsor, but has recently clarified its definitions.

Currently, the IRS has clarified what are NOT qualifying sponsorships:

  • Any payment if the amount is contingent upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events; or 
  • Any payment which entitles the payor to the use or acknowledgement of its name or logo in regularly scheduled and printed material published by or on behalf of the exempt organization that is not related to a specific event conducted by the exempt organization; or
  • Any payment made in connection with any qualified convention or trade show activity. (The term “convention and trade show activity” means an activity traditionally conducted at conventions, annual meetings, or trade shows (IRC Sec. 513(d)(3)(B)).

If any of these payment conditions are met, the revenue should be considered advertising income and taxed as unrelated business income.

It is important to note that acknowledgements at the event do not constitute UBI. These can include sponsor logos and slogans (that do not contain comparative or qualitative descriptions), sponsor website links, value neutral descriptions or sponsor product listing. These cannot include any promotion of the sponsor’s products or services. 

For example, the President of the Board should not stand at the podium and ask all the participants at a fundraising event to “contact Jones & Associates today for the best accounting services in the Puget Sound!”  Such a claim would be a promotion of the sponsor’s services, making any income from that sponsor likely taxable as UBI.

Another area to watch for is any substantial return benefit. For example, if, in exchange for sponsorship funds, the sponsor receives a free full-page ad in the event program, exclusive right to have their name on all materials that would limit any competitors, free tickets to the event, etc., this substantial return could constitute treatment of the income as UBI and taxable.

Here is a checklist on how to determine if your “sponsorship” is really advertising income that may be subject to UBI:

  • Review contracts for sponsorship payments to determine if:
    • The “sponsor received any substantial return benefit or if payments are contingent upon the level of attendance.
    • The payment entitles the payor to the exclusive use or acknowledgement of its name or logo in periodicals that would limit competitors.
    • The payment is made in connection with any qualified convention or trade show activity.
    • Any other exclusive provider arrangement exists.
  • Determine if the use or acknowledgement contains:
    • Qualitative or comparative language
    • Price information
    • Indications of savings or value
    • An endorsement or an inducement to purchase, sell, or use such products or services.

If any of these conditions are met, likely the income should be considered advertising income and subject to UBI.  For more information on the IRS rules, see their article, Advertising or Qualified Sponsorship Payments?

By Judy C. Jones, CPA

Featured image via Pexels