As a follow-up to our “What is Considered Unrelated Business Income?” blog post regarding unrelated business income tax (UBIT), written by Shannon Crowley, the following highlights some of the key factors used when determining whether or not advertising and sponsorship revenue are considered unrelated business income (UBI).
Generally, the IRS considers revenue derived from commercial advertising activities to be UBI; however, advertising revenue is not UBI if:
- It is not regularly carried on;
- It is substantially related to the organization’s exempt purpose;
- Substantially all the advertising activity is conducted by volunteers;
- The purchaser of the advertising does not expect more than a negligible commercial benefit by the advertisement; and
- It is simply a listing of names of businesses with no advertising message or index to advertisers.
Often, a non-profit will produce a periodical (e.q., newsletter, magazine, etc.) that is related to their exempt purpose and sell commercial advertising space within the publication. When the advertising is purchased for the purpose of inducing a reader to purchase the goods or services of that business, the revenue is likely UBI. Indications of advertising usually include messages that contain qualitative language, promotion of the business entity’s products, services or facilities, or statements of pricing or value.
Qualified Sponsorship Payments
Revenue derived from qualified sponsorship payments (QSP) are excluded as UBI. Typically, this is seen with fundraising or program events and acknowledgements of corporate sponsors in an event program. A QSP is a payment (cash, property or services) by a business entity to an exempt organization, without an arrangement or expectation that the sponsor will receive any substantial return benefit from the payment. A substantial return benefit generally does not include use of the business entity’s name, logo, slogans or contact information. If there is some element of advertising (as described above) provided to a sponsor in return for their payment, the amount exceeding the fair market value of the advertising purchased would be considered to be a QSP.
For more information, see IRS Publication 598.
Jeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.