Under the Internal Revenue Code, “qualified sponsorship payments” to not-for-profits aren’t subject to unrelated business income tax (UBIT). Qualified payments refer to money, property transfers or the performance of services by a business without an expectation or arrangement that the business will receive any “substantial return benefit” in exchange. However, some corporate sponsorships don’t qualify, and your organization could end up with UBIT liability.
How do sponsors benefit?
Qualified sponsorship payments may fund a single event, a series of related events, an ongoing activity or continuing support of your nonprofit’s operation. Qualified sponsorship payments don’t have to relate to your exempt purpose.
But return benefits to the sponsor other than acknowledgments can result in UBIT. Such benefits include:
- Advertising,
- Goods, facilities, services or other privileges,
- Rights to your nonprofit’s trademark or logo, or
- Exclusive provider arrangements.
A note about exclusive sponsorships: You can agree that a sponsor will be exclusive, but you can’t, for example, exclude or limit a competitor’s products at a sponsored event.
What’s excluded?
If a sponsor receives a substantial return benefit, only the amount that exceeds the benefit’s fair market value (FMV) is a qualified sponsorship payment. And if you can’t establish that the payment exceeds the FMV, no portion of the payment constitutes a qualified sponsorship payment.
Payments contingent on the degree of public exposure, such as the level of attendance at your event, broadcast ratings or similar factors, aren’t qualified sponsorship payments. Neither are payments related to convention or trade show activities. Also excluded are payments that entitle the sponsor to use its name or logo in your regularly scheduled periodicals, such as magazines or e-newsletters. If part of a payment is qualified and part isn’t, the IRS will treat the portions as separate payments.
How can you acknowledge support?
The primary dilemma presented by corporate sponsorships is the issue of advertising. In general, advertising is intended to promote a sponsor’s products, services or facilities — and it can get you in hot water.
To avoid UBIT issues, provide only acknowledgments. These can include the sponsor’s logo, slogans, brand or trade names; locations and phone numbers; product service listings; and value-neutral descriptions of its product line or services. An acknowledgment can also link to a sponsor’s website, provided it directs to the website’s home page, not to the page of a particular product or service. Try to avoid comparative or qualitative descriptions — for example, “the best software for nonprofits.”
Acknowledgments shouldn’t include price information, indications of savings or value, or an endorsement or inducement to buy, sell or use the sponsor’s products or services. But mere display or distribution of a sponsor’s product at a sponsored activity typically isn’t considered an inducement.
Qualified vs. nonqualified
At a time when every dollar counts, your nonprofit doesn’t want to learn it’s on the hook for UBIT. We can help. Contact us to learn more about the difference between qualified vs. nonqualified sponsorship payments.
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