The answer is…YES! It is extremely important for nonprofit organizations to know the difference between advertising and sponsorship revenue as advertising revenue over $1,000 is subject to unrelated business income tax (UBIT) while qualified sponsorship payments are not subject to UBIT.
All nonprofit organizations that regularly carry on a trade or business that is not substantially related to its exempt purpose (such as advertising) is subject to tax on that income and required to file Federal Form 990-T.
IRS Publication 598 states qualified sponsorship payments are payments received by a person engaged in a trade or business where there is no arrangement or expectation that the person will receive any substantial benefit in return. Per IRS rules, nonprofit organizations can acknowledge sponsors by mentioning or displaying the company name and logo. Nonprofits are also permitted to mention slogans and value-neutral descriptions of a sponsor’s goods or services in acknowledging their support.
For example, a local restaurant agrees to sponsor a 5k race that a nonprofit organization is organizing. The restaurant makes a payment to the nonprofit, and in return, the nonprofit prints the name and logo of the restaurant on the back of the race t-shirts. The acknowledgment of the restaurant’s name and logo is only a minor benefit and is not considered advertising (per the definition in the next paragraph); therefore, the income is a considered a qualified sponsorship payment and is exempt from UBIT.
A payment is not considered a qualified sponsorship payment if the nonprofit organization advertises the sponsor’s products or services. IRS Publication 598 states that advertising includes the following:
- Messages containing qualitative or comparative language, price information, or other indications of savings or value;
- Endorsements; and
- Inducements to purchase, sell, or use the products or services
For example, a local restaurant pays a nonprofit organization on a regular basis to run an advertisement that states mention this ad and receive 10% of your next visit. This constitutes advertising and the income would be subject to UBIT.
The distinguishing factors between sponsorship and advertising proceeds can be grey at times since every situation is unique. As a result, we recommend contacting your accountant, or a member of our trusted nonprofit team, to assist your organization in making a supported determination.