Tax Brief: Qualified Sponsorship vs. Advertising

A nonprofit can raise money through both qualified sponsorship payments and advertising; however, it is imperative the appropriate distinction between the two is made. Income generated from the sale of advertisement space is considered an unrelated business activity, therefore subject to unrelated business income tax (UBIT), while qualified sponsorship payments are not subject to UBIT. Below we provide a brief overview of the components of qualified sponsorship payments vs. advertising revenue. 

Qualified Sponsorship Payments

Qualified sponsorship payments are not considered unrelated business income to nonprofit organizations. This type of payment is defined by the Internal Revenue Code (IRC) Section 513(i) as: “any payment of money, transfer of property or the performance of services, by any person engaged in a trade or business, where there is no arrangement or expectation that the person will receive any substantial return benefit in exchange 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 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).” It does not matter whether the sponsored activity is related or unrelated to the recipient’s exempt purpose or whether the sponsored activity is temporary or permanent, as long as no substantial return benefit is expected by the person.

Advertising Revenue

Advertising revenue is determined by the existence of substantial return benefits generated, such as promoting or marketing a trade or business, service, facility, or product. Advertising is defined in Treas. Reg. 1.513-4(c)(2)(v) as “any message or other programming material which is broadcast or otherwise transmitted, published, displayed or distributed and which promotes or markets any trade or business or any service, facility or product. Advertising includes messages containing qualitative or comparative language, price information or other indications of savings or value associated with a product or service, an endorsement or an inducement to purchase, sell or use the sponsor’s company, service, facility or product.”  Additionally, the IRS notes “a message that contains comparative or qualitative descriptions does not meet the definition of a qualified sponsorship and is advertising. A single message that contains both advertising and acknowledgement is advertising.” Advertising revenue is considered unrelated business income and is subject to unrelated business income tax. 

Conclusion

In conclusion, when designing sponsorship packages/arrangements and when sponsorship revenue, it is important to determine if any substantial return benefit is provided in return in order to properly identify tax consequences and to properly report the activity on the organization’s informational tax return. Simple acknowledgements at events or in writing is not considered advertising revenue, unless such acknowledgements are acting as a vehicle to entice consumer spending or marketing a trade or business, service, facility, or product. The above information is only a brief summary and the regulations and IRS guidance should be reviewed carefully. Knowing the tax implications ahead of time will help ensure organizations make an informed decision when considering accepting sponsorship payments. 

The purpose of this article is to summarize the major components of qualified sponsorship payments vs. advertising revenue and is not intended to be an all-encompassing or serve as replacement for the IRS regulations and Forms 990/990-T instructions.

Helpful Links:

IRS: Advertising or Qualified Sponsorship Payments?

This article is meant to be a resource and provide tools to assist your organization. Please consult your tax advisor regarding your specific tax situations.