By Sandra Feinsmith, CPA

Social media can offer cost-effective platforms through which nonprofit organizations can better communicate with stakeholders and raise awareness of their causes and fundraising efforts.

Following major online giving success stories such as #GivingTuesday and The ALS Association’s Ice Bucket Challenge,
more nonprofits are actively participating on social media channels to get in front of potential donors: U.S. nonprofits saw 37 percent growth in followers on Facebook in 2013, and 46 percent annual growth in Twitter followers, according to the 2014 eNonprofits Benchmark Study by M+R.

While nonprofit organizations are increasing their use of social media, the Internal Revenue Service (IRS) has so far provided very little guidance to organizations regarding both the use of social media and its potential tax implications. The official IRS stance is to treat online communications—including email, blogs, Facebook, Twitter and the like—the
same as printed media, such as periodicals.

The IRS defines a periodical as “any regularly scheduled and printed material (e.g., a monthly newsletter) published on behalf of the organization.” When an organization’s printed periodical contains editorial information related to the organization’s exempt purpose, the IRS treats the sale of advertising in the publication as an unrelated business that exploits an exempt activity. As such, the organization is subject to the rules governing the calculation of Unrelated
Business Income Tax (UBIT) for advertising. Of course, these very same rules pertaining to UBIT around advertising income and expenses also apply to online publications and social media, given the current IRS stance.

The sole, distinguishing snippet of IRS guidance regarding online activities and social media is contained in Internal Revenue Code (IRC) Regulations section 1.513-4(f), which describes what constitutes a Qualified Sponsorship Payment versus advertising in online activities. To illustrate this, let’s consider a scenario in which a symphony orchestra maintains a website containing pertinent information about the organization and its performance schedule. A business
(“Music Shop”) makes a payment to the orchestra to fund a concert series and, in return, the organization adds the business to the list of sponsors it features on its website. It does not promote Music Shop or advertise its merchandise, but the orchestra’s website does provide a hyperlink to Music Shop’s website. The orchestra’s posting of Music Shop’s name and Internet address on its website constitutes acknowledgement of the sponsorship. The entire payment is a Qualified Sponsorship Payment, which is not considered income from an unrelated trade or business.

Now, consider how the following scenario differs:

A nonprofit organization tweets that one of its corporate sponsors is running a special on computers and receives a commission based on the number of tweeters who access the sponsor’s site. Thus, under current IRS rules and regulations, the tweet may impact the overall corporate sponsorship agreement, the commission would constitute unrelated business income, and the tweet would be considered advertising.

Given such limited and vague guidelines, it is no surprise, then, that exempt organizations may be unsure of their obligations while using social media. We fully anticipate that, in the near future, the IRS will release more thorough guidance for tax-exempt organizations surrounding their social media use. Though this guidance does not yet exist, nonprofits cannot overlook the potential tax liabilities associated with social and digital media use. IRS agents have been trained to look at and request screenshots of an organization’s website and other forms of online communications. Essentially, online platforms provide open access to organizations’ information, offering an audit trail for the IRS and states regarding:

• Political and lobbying activities
• Consistency of organizations’ online and social media activities with their exempt purpose
• Potential sources of unrelated business income—such as advertising—versus Qualified Sponsorship Income
• Charitable solicitation (which is also of interest to state charity regulators)

A lot of damage can be done in 140 characters. Organizations should take care to accurately report all online activity in order to make sure they are protected. To help organize and implement this process, organizations should develop and enforce social media policies for both the organization as a whole and its individual employees and volunteers. A sound
social media policy can help prevent mix-ups between advertising income and Qualified Sponsorship Income long before the issue ever becomes a problem.

When crafting a social media policy, organizations should think carefully about what they hope to achieve and balance
that with how these desired activities may venture into unrelated business. Organizations must also remain cognizant of the laws and regulations associated with social media, including issues related to copyright, fair use and data protection. Some specific considerations organizations should keep in mind as they develop and implement their social media policies include:

• Who has the right and responsibility to post under the organization’s name, as well as what is expected of those participating in social media conversations under their own names while publicizing their affiliation with the organization
• The organization’s goals for using social media (e.g., is it a fundraising tool, an awareness tool, a community engagement tool or some combination of all three?)
• The types of content that are appropriate for sharing, with an eye toward clearly establishing whether sponsored content could be linked to a Qualified Sponsorship Payment or advertising. The policy should include explanations and examples of each.
• Clear guidelines around what information can be shared and what is confidential
• Protocols for handling breaches of the social media policy by employees and volunteers of the organization
• A resolution plan for any potential social media crises, such as inappropriate postings or negative feedback from social media followers
• Opportunities and processes for organizational employees or volunteers to share their feedback and questions about the policy

As with normal offline activities, organizations should consult their tax advisor and legal counsel to make sure that their online and social media activities are structured correctly and they are fully apprised of the potential tax ramifications of their social presence. This will go a long way in minimizing exposure to regulatory scrutiny, and it will help protect the organization’s reputation.

For more information contact a Templeton Advisor.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2014). Copyright © 2014 BDO USA, LLP. All rights reserved. www.bdo.com