Retro TV Commercial

 

Generally, net income from unrelated business activities will be subject to the unrelated business income tax (”UBIT”) if the activity constitutes (1) a trade or business, (2) that is regularly carried on, and (3) is not substantially related to the furtherance of the organization’s exempt purpose.  The IRS considers soliciting, selling, and publishing commercial advertising to constitute a trade or business that, if regularly carried on and not substantially related to the organization’s exempt purpose, may produce income subject to UBIT.  In contrast to advertising, however, qualified sponsorship payments (“QSPs”) are specifically excluded from the definition of unrelated trade or business.  Accordingly, income generated from QSPs is not subject to UBIT.  So what’s the difference between advertising and QSPs and how can your organization plan accordingly?

Advertising

Advertising includes endorsements; inducements to use, sell, or purchase certain products or services; and messages that contain qualitative or comparative language, indications of value, or price information.  For example, if a nonprofit issues a monthly newsletter in which it sells space to companies to use to describe and encourage readers to purchase their goods or services, this will constitute advertising and such sales will likely generate unrelated business income potentially subject to UBIT.  Moreover, the fact that commercial advertising is included in a publication, such as a journal, that otherwise contains material related to the publishing organization’s exempt purpose will not lead to the advertising itself being considered related and income generated from such advertising will likely be considered unrelated business income.  However, keep in mind that advertisements that are contained in a publication related to a one-time event, such as a program at a fundraising gala, are not likely to be considered regularly carried on.  Therefore, the income generated from such advertising activities will not be subject to UBIT.

Qualified Sponsorship Payments

In contrast to advertising, a qualified sponsorship payment is any 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 connection with a QSP without turning the QSP into advertising.  These minor benefits may include acknowledgement of the sponsorship through use of the donor’s name or logo, or goods or services of an insubstantial value.  If the nonprofit does provide the use or acknowledgment of a donor’s sponsorship, it should not include qualitative statements regarding or endorsements of the donor’s goods or services in the acknowledgment.  However, a use or acknowledgment may include a list of the donor’s locations, contact numbers, or website; a logo or established slogan; and value-neutral descriptions, displays, or depictions of products or services.  In general, the content of the use or acknowledgment should be controlled by the nonprofit and not by the entity making the payment.

For example, let’s assume that a local pizza chain agrees to sponsor an amateur soccer team organized by a local nonprofit and the nonprofit in exchange agrees to acknowledge the sponsorship by placing the pizza chain’s name and logo (and no other qualitative or comparative statements) on the back of the team jerseys.  In this example, the payment provided by the pizza chain will be a QSP and will not be subject to UBIT.  However, one additional separate exception to be aware of is that a payment for the use or acknowledgment of a business name, logo, or product in a nonprofit’s periodical (which generally includes any regularly scheduled and printed material published by or on behalf of a nonprofit) will be treated under the rules that apply to income derived from advertising activities, even if the payment otherwise seems to qualify as a QSP.

Payments that are Both for Advertising and Qualified Sponsorship Payments

Sometimes, a payment to a nonprofit can constitute both a payment for advertising and a qualified sponsorship payment.  Using the example above, this may be the case if the pizza chain agrees to make a payment to the local nonprofit in exchange for both having its name and logo placed on the back of the team jerseys and for running an ad of the pizza chain’s design on the nonprofit’s website on a regular basis.  In this case, the IRS will treat the payment as two separate payments and UBIT will only be applied to the part of the payment that represents the fair market value of the website advertising that the pizza chain is receiving in return.  However, in instances in which a nonprofit is accepting a payment that is both for advertising and constitutes a qualified sponsorship payment, it may be wise for the organization to separate out the payments into two separate transactions and to document them separately in order to more clearly establish whether and to what extent any portion of the payment is subject to UBIT.

For more information, see IRS Publication 598.

7 Responses to “UBIT: Advertisements vs. Qualified Sponsorship Payments”

  1. Tamara

    Hello. Do you know whether there are any regulatory obligations in a situation where a for-profit magazine is soliciting its supporters to donate to a nonprofit in one of its features, without being paid to do so or without selling anything in conjunction (which would make it more of a commercial co venture). The funds raised initially go to a foundation that then disperses the money to the nonprofit.

    • Gene Takagi

      This will be a matter of state law (and states may differ in their respective laws and regulations). But I’m unaware of any laws prohibiting one entity from encouraging people to donate to a nonprofit so long as it is not making any misrepresentations or engaging in the solicitation for money or accepting money to forward to the nonprofit. I think, for example, that I may have a Constitutional right (free speech) to publicly state donate to your local YMCA whether the local YMCA has authorized me to make such statement or not.

  2. Russell Houston

    What is the definition of “printed” as it relates to a payment for acknowledgment of a business name, logo, or product in a nonprofit’s periodical. My organization is considering placing underwriting acknowledgements in our weekly electronic newsletter. Would these acknowledgements be treated under the rules that apply to income derived from advertising activities or could they be considered a OSP?

    • Gene Takagi

      26 CFR 1.513-4(b) – “For this purpose, printed material includes material that is published electronically.”

  3. Jenna Wallace

    Our Non-profit wants to offer banners for donors to be displayed for 3-12 months at our fundraising facility (an indoor soccer arena that we hold our event at) depending on the sponsorship level. All banners and their content only include the donor’s locations, contact numbers, or website; a logo or established slogan; and value-neutral descriptions, displays, or depictions of products or services. Based on what we’ve found, the banners themselves and their content we believe fall under QSP. The question we have is would our foundation be subject to UBIT by the IRS if we take a portion of the donor’s sponsorship $$ to pay the facility for the time that the banner will be up?

    • Gene Takagi

      Generally, if payments fall within the definition of a QSP because, in part, there is no arrangement or expectation that the person will receive any substantial return benefit, use of the payments to advance the charity’s charitable purposes without providing a substantial return benefit to the contributor should not jeopardize the QSP. But in your case, the issue may be whether the banners are advertising because they are displayed not only at the fundraising event but for 3-12 months continuously. And the cost of paying the facility is the cost of being engaged in an unrelated advertising business.

  4. Week 4 Monitoring NPR | motesselturk

    […] Badrick, E. (2014, March 13). UBIT: Advertisements vs. Qualified Sponsorship Payments. Retrieved July 23, 2015, from Nonprofit Law Blog: http://www.nonprofitlawblog.com/ubit-advertisements-vs-qualified-sponsorship-payments/ […]

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