Differentiating Between Advertising and Sponsorship Income for 990-T Filing
The IRS defines unrelated trade or business income is the gross income derived from any trade or business regularly carried on and not substantially related to the organization’s exempt purpose or function. A trade or business is considered not substantially related to the organization’s exempt purpose or function if the activity that produces the income doesn’t contribute importantly to the exempt purposes of the organization, other than the need for funds. Whether an activity contributes importantly depends in each case on the facts involved.
Advertising and sponsorship related income received by an exempt organization often falls under the classification of income unrelated to the organization’s exempt purpose and therefore, may generate unrelated business income and therefore be subject to unrelated business income tax. Understanding the differences between the two and their potential impact on unrelated business income tax for your exempt organization is important.
IRC Section 513(i) describes qualified sponsorship payments as any payment to a tax-exempt organization by a person engaged in a trade or business in which there is no arrangement or expectation of any substantial return benefit other than acknowledgement, such as:
- Name
- Logo
- Address
- Website
- Phone number
- Neutral description of products or services
Advertising is defined in Treas. Reg. 1.513-4(c)(2)(v) as any message or other programming material which is broadcast or otherwise transmitted, published, displayed or distributed and which promotes or markets any trade or business or any service, facility or product. Advertising includes messages containing qualitative or comparative language, price information or other indications of savings or value associated with a product or service, an endorsement or an inducement to purchase, sell or use the sponsor’s company, service, facility or product. Examples of such messages include:
- “Buy Now”
- “Discount/Special Offer”
- “At a Great Price”
- “Best service in Town”
- “Compare us to”
Qualified sponsorship payments received by an exempt organization would be excluded from unrelated business income, whereas qualified advertising payments received would be consider unrelated business income and potentially be subject to unrelated business tax.
Since exempt organizations with unrelated business income in excess of a $1,000 standard deduction are subject to unrelated business tax at 21%, it is important to understand the differences between qualified sponsorship payments and qualified advertising payments. Sometimes, payments received by an exempt organization can represent both a qualified sponsorship payment and advertising. In this case, the exempt organization could need to use a reasonable method to allocate the payment between the two, to assure that only the advertising portion is included as unrelated business income to avoid paying more tax then necessary.
In considering whether your exempt organization has unrelated business income, it is also important to consider your organization’s exempt purpose. Consider your missing statement or program services offered and whether payments you receive contribute importantly to the exempt purpose.
In the case of 501(c)(6) organizations, which are nonprofits that primarily serve the members’ business interests, rather than the general public, advertising payments received would not automatically be considered unrelated business income. In the case of a Chamber of Commerce that is designed to promote all businesses and enhance the economic prosperity of its community, advertising payments may be considered part of its exempt purpose. The key consideration would be if the advertising payment clearly promotes one business over others and provides them with benefits not received by other similar businesses. Payments could be received from certain businesses that enhance their placement as long as all similar businesses are still presented and acknowledged, like on a Chamber of Commerce’s website.
