Many nonprofit organizations operate on a tight budget, making it important to capitalize on revenue at every possible opportunity. One common way to increase revenue is to sell sponsorships to local businesses. An organization that sells sponsorships must be careful not to cross the line into advertising unless they are prepared for the additional complexities that come with advertising dollars. But what is the difference between sponsorships and advertising?
Any nonprofit that regularly carries on a trade or business that is not substantially related to its exempt purpose is subject to Unrelated Business Income Tax (UBIT) and is required to file Form 990-T. Qualified sponsorship payments are not subject to UBIT. Advertising payments, on the other hand, are subject to UBIT for revenues over $1,000.
According to the IRS, a qualified sponsorship payment is “any payment made by a person engaged in a trade or business for which the person will receive no substantial benefit other than the use or acknowledgement of the business name, logo, or product lines in connection with the organization’s activities.” If your organization simply acknowledges the sponsor’s name, logo, and/or slogan, then you would not have to pay tax on that income.
For example, say a local florist agrees to sponsor a special event that your nonprofit is organizing. The florist makes a payment for their sponsorship, and in return, your nonprofit prints the name and logo of the florist on the programs given out at the event. The acknowledgment of the florist’s name and logo is only a minor benefit and is not considered advertising; therefore, the income is a qualified sponsorship payment and is exempt from UBIT.
However, if your organization promotes the sponsor’s products or services, then the sponsorship would be accounted for as an advertising expense – which would trigger UBIT. Activities that “promote” the sponsor’s products or services include:
Messages containing qualitative or comparative language, price information, or other indications of savings or value
Inducements to purchase, sell, or use the products or services
If a local restaurateur pays your nonprofit to run a monthly ad featuring a coupon for 10% off at the restaurant, this would constitute advertising and the income would be subject to UBIT. If your organization publishes a monthly journal or periodical and sells space for businesses to display their name, logo, or product lines within the publication, that would also be considered advertising.
The difference between sponsorship and advertising revenue can be difficult to ascertain at times, since every situation is unique. If your nonprofit needs help navigating unrelated business income tax, please read IRS Publication 598 or consult an accounting professional.