Organizations often enter into sponsorship agreements with different businesses within their communities to help support the cost of programs and events. For an organization that is tax exempt under section 501(c)(3) of the U.S. Internal Revenue Code, it is important for the organization to understand the terms of each agreement to help it determine its exposure to taxable unrelated business income (UBI).
What is the key issue with respect to sponsorship agreements?
The key issue with respect to sponsorship agreements is whether a payment received is considered "Advertising" or a "Qualified Sponsorship Payment". Advertising is taxed as unrelated business income, while qualified sponsorship payments are not subject to tax.
- If the agreement has a quality comparison with other businesses, pricing comparisons, or any call to action (a request to buy from the sponsor) it will be considered advertising.
- For example: This event has been sponsored by ABC Company. "Lowest prices on the West Coast"
- An endorsement of any products or services by the exempt organization will also cause the revenue to be treated as UBI.
- A qualified sponsorship payment is a payment made in return for an agreement to use or acknowledge the business’ name or logo.
- For example: This event has been sponsored by ABC Company. “Paper products for true professionals."
- The acknowledgement may contain the business name or logo but otherwise cannot provide any “substantial return benefit".
- Benefits such as complementary tickets or sponsor receptions are considered to be substantial unless they have a fair market value of not more than two percent of the payment.
What about links to businesses on your institution’s website?
Often, a business will place a logo with a link to their website on an exempt organization’s home page. Generally, this does not subject the revenue to tax unless the link goes directly to a page that has quality comparisons, price comparisons, or a call to action. These arrangements should be reviewed carefully and monitored regularly.
What should you do now?
The differences between an agreement that is considered advertising and one that is treated as a qualified sponsorship payment can be very subtle. It is important that you review your sponsorship agreements to identify, and properly address, any potential UBI issues.