Posted on 03.24.14
Author: John E. Kent, Jr., CPA | Partner | Not for Profit Industry Team
Nonprofits receive income from businesses in a variety of ways, such as: (1) charitable contributions; (2) payment for activities that are unrelated to the nonprofit's mission, such as advertising; and (3) corporate sponsorships.
When it comes to corporate sponsorships, payments from a business sponsor can actually be a mixture of charitable contributions and advertising. It is usually in the best interest of the nonprofit to structure the payments so that the IRS regards the payments as charitable contributions to support the fulfillment of the nonprofit's mission. Such payments are defined by the IRS as “qualified sponsorship payments.” Corporate sponsorship payments that are provided in return for specific advertising opportunities will result in the payments being considered advertising income. While it is fine to acknowledge a corporation's support for a conference or special event with a banner and a public 'thank you' from the podium, if the sponsorship automatically also comes with a full page 'ad' in the conference brochure, with text written by the corporation that promotes its products and services to attendees at the conference, at least some of the corporate sponsorship payment is likely to be considered advertising income. In such cases the nonprofit will have to report that portion of the income as “unrelated business income “(“UBI”) which is subject to tax (“UBIT” = “unrelated business income tax”). It is important for organizations that receive sponsorship payments to understand what types of sponsorship payments may trigger UBIT as an “advertisement” and what types of acknowledgments a nonprofit can provide to a corporate sponsor without tipping the scale into the advertising realm.
Please contact your Keiter representative or Keiter’s Not for Profit Industry team should you have questions regarding taxability of sponsorship payments. 804.747.0000 | firstname.lastname@example.org.