The 990 filing deadline for calendar year organizations has passed, but deadlines for fiscal year organizations are just around the corner! In the fourth article of our UBI series, we’re going to tackle if (and when) sponsorship income is subject to unrelated business income tax (UBIT).
Q: Isn’t a sponsorship just a form of advertising? Why wouldn’t it always be subject to UBIT?
A: You could reasonably argue that sponsorships are a form of advertising, which is nearly always considered UBI. After all, they normally involve displaying the name of some type of organization, often a for-profit company. Not everyone will define advertising the same way, though. That’s an issue the IRS struggled with, so in 1997 it created a special category of income called a “Qualified Sponsorship Payment” (QSP) that was specifically excepted from being subject to UBIT.
Q: How do I know if my sponsorships qualify to be treated as QSPs?
A: The IRS defines a QSP as “any payment made by any person engaged in a trade or business with respect to which there is no arrangement or expectation that such person will receive any substantial return benefit other than the use or acknowledgement of the name or logo (or product lines) of such person’s trade or business in connection with the activities of the organization that receives such payment. Such a use or acknowledgement does not include advertising such person’s products or services (including messages containing qualitative or comparative language, price information, or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use such products or services).”
Q: That seems complicated. What does that mean in laymen’s terms?
A: Basically it means that if all you do in exchange for your sponsorship payment is show the organization’s name and/or logo, or similar information for its products, that payment won’t be subject to UBIT. If you do much beyond that you start to potentially wade into taxable territory.
Q: Are there any specific things I can or can’t do to make sure I don’t have the payments subject to UBIT?
A: There are a number of things you can’t do for your sponsor and still expect to receive QSP treatment. Here are a few:
- include messages containing qualitative or comparative language, price information or other indications of savings or value associated with a product or service
- endorse a sponsor’s company or a product or service of that company
- including an inducement to purchase, sell or use the sponsor’s company or a product or service of that company
- have the amount of the payment contingent on attendance levels at one or more events, broadcast ratings, or similar factors
There are also some things you specifically can do and still avoicd treating the payments as UBI:
- acknowledge the sponsor’s payment
- distribute a sponsor’s product to the general public at the sponsored event
- list your sponsor’s locations, telephone numbers or website
- include value-neutral descriptions related to your sponsor, such as displays or visual descriptions of product lines and/or services
- use logos or slogans of your sponsor, as long as they do not contain qualitative or comparative descriptions of the sponsor or its products, services or facilities
Q: What if a company is a sponsor, but also advertises with our organization?
A: That could be very tricky. Conceptually there’s nothing wrong with it, but it is best practice to have separate agreements for the advertising and the sponsorship. You’ll also want to make sure that the amount the sponsor is paying for advertising is the fair market value. If you don’t establish that the payment for advertising is at fair market value, then the entire amount of the payment(s) could be classified as advertising and thus subject to UBIT.
As you can see, determining whether the payment from your sponsor is considered a QSP can be complicated. If you need any help figuring it out, please feel free to contact us. We’d be happy to help.