Are Sponsorships Considered Unrelated Business Income?

In today's economy, management and boards of directors are faced with thinking "outside the box" to generate supplementary revenue in support of their organizations' missions. Additional revenue sources can come in many forms and management will need to consider if the revenue is in accordance with their exempt purpose, subject to unrelated business income tax, or excluded from unrelated business income tax.

One option organizations are considering for additional support is to seek sponsorship revenue or obtain a "corporate sponsor". Unfortunately the distinction between sponsorships and advertising income can be difficult. In the Internal Revenue Code section 513(i) Treatment of Certain Sponsorship Payments, the receipt of qualified sponsorship payments are excluded from unrelated business income for exempt organizations subject to the provision of unrelated business income taxes. A qualified sponsorship payment is a payment made to an exempt organization by an entity engaged in a trade or business, without an "arrangement or expectation" that the sponsor will receive any "substantial return benefit." Payments made in connection with qualified convention or trade show activities and income derived from the sale of advertising or acknowledgments in an exempt organization's periodicals are not considered to be qualified sponsorship payments. (Periodicals are defined as regularly scheduled printed or electronic materials published by or on behalf of the organization, which are not related to and primarily distributed in connection with a specific event conducted by the exempt organization.)

Organizations must be able to establish that there are no substantial return benefits to the sponsor in order to exclude the sponsorship payment from unrelated business income. Simple acknowledgment of sponsor's name or logo does not constitute a substantial return benefit. The IRS Code section also allows the exempt organization to mention the sponsor's location, telephone number, internet address, and value-neutral descriptions of the sponsor's good or services without disqualifying the payment. In addition, the sponsor's product can be displayed or distributed to the general public at the sponsored activity without disqualification. Substantial return benefits WOULD include:

• Sponsor recognition that includes promoting the sponsor's products, facilities, or services. Advertising is considered sponsor recognition if the message contains qualitative or comparative language, price information, or an endorsement of their product or services.
• Exclusive provider arrangements, including the arrangement of sponsors limiting the sale, distribution, availability, or use of competitors' products, services or facilities in connection with a sponsored activity.
• Providing facilities, services, or other privileges to the sponsor or persons designated by the sponsor (subject to a de minimis exception).
• Granting the sponsor an exclusive or nonexclusive right to use a trademark, patent, logo, or designation of the exempt organization.

Once the organization has determined that the sponsor does not receive any substantial return benefits, the organization must consider sponsor acknowledgment. Acknowledgements (even acknowledgements that don't meet the definition of advertising) in a regularly scheduled periodical that are a required condition of the sponsorship payment, cause the payment to be advertising income, based on exclusions within this Internal Revenue Code section. It implies that even voluntary acknowledgment in a regularly scheduled periodical could cause a payment to be advertising. Sponsorship payments that are contingent, contractually or otherwise, upon the amount of public exposure received by the sponsor (such as the level of attendance at event), are disqualified and subject to unrelated business income.

Finally, sponsorship income is not unrelated business income unless it is derived from an unrelated business activity. To be considered an unrelated business activity, the activity must be both unrelated to the exempt function of the organization and regularly carried on for the production of income.

With the new accounting standard, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, it has become even more essential to analyze revenue streams and document the organization's tax position on such transactions. While ideally all revenue could be excluded from unrelated business income, it is important to realize that revenue subject to unrelated business income tax could provide additional support for your organization.

If you would like more information please contact Jenny Tarkowski, Partner, Wegner CPAs & Consultants at (262) 522-7555 or jenny.tarkowski@wegnercpas.com.