Tax-exempt organizations must be attentive to the tax implications of their activities and events. A critical consideration is unrelated business income (UBI), or income subject to income taxes. An important area for consideration is sponsorship arrangements. The careful and proper planning of the structure of sponsorship arrangements can help a tax-exempt organization avoid income taxes. It is important to understand what types of sponsorship income are excluded from UBI.
According to the Internal Revenue Code, “unrelated trade or business does not include the soliciting and receiving of qualified sponsorship payments.” The key to interpreting the Code is to understand what qualified sponsorship payments (QSP) are. A QSP is any payment made by a person engaged in a trade or business where there is no arrangement or expectation that the person will receive any substantial return benefit. The only return benefit will be the use or acknowledgement of the name or logo of the person’s trade or business in connection with the activities of the organization to which the payment is made. Such a use or acknowledgement does not include advertising the person’s products or services such as including messages which contain 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.
Additionally, a QSP cannot entitle the sponsor to a regular ongoing display of its name or logo in a tax-exempt organization’s periodical publication. A QSP does not include payments in connection with any qualified convention or trade show activity of an exempt organization. These sponsorship payments are evaluated under the general provisions of UBI taxation and may be exempt under qualified convention or trade show provisions.
When tax-exempt organizations are negotiating written agreements with sponsors, it is important to focus on what the sponsor is seeking in return for their sponsorship payment. Any call to action in the acknowledgement of the sponsor may be deemed as advertising income. In addition, the tax-exempt organization must be aware that provisions regarding exclusivity may also deem the sponsorship revenues subject to taxable income. The Internal Revenue Service has asserted that any arrangement limiting the sale, distribution, availability or use of competing products, services or facilities in connection with a sponsored activity results in substantial return benefit.
A tax exempt organization should never turn away a sponsorship just because the sponsorship revenues may be deemed UBI and therefore subject to income tax. Proper planning can help the organization determine the cash reserves necessary to cover the tax burden. It is advised that an organization consult with its tax advisor before entering into sponsorship arrangements to address these issues in advance.
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