Not-for-profit organizations are called “tax-exempt,” but, as our 501(c)(3) clients know well, they may be—and are—taxed on income that’s unrelated to their mission, called “unrelated business income.” What’s more, the line between unrelated business income and income having to do with an organization’s mission is often blurry—that’s one of the reasons nonprofit organizations need a good accountant.
One good example of this is sponsorships. On its face, a business’ sponsorship of, say, a nonprofit organization’s fundraiser seems like a win-win situation: The organization gets money (or in-kind services) and the company gets good publicity (not to mention a tax deduction). But, if nonprofits aren’t careful, sponsorships can easily cross a not-all-that-clear line and be deemed “advertising” by the IRS—making the sponsorship payments taxable unrelated business income.
For a sponsorship to qualify as tax-free, according to the IRS, the sponsor must “receive no substantial benefit other than the use or acknowledgement of the business name, logo or product lines in connection with the organization’s activities.” Where nonprofits get into trouble and risk the tax-exempt status of sponsorship payments is in “advertising” the sponsor or its products with certain kinds of statements. The IRS considers the following types of statements (among others) to be advertising:
- Messages containing qualitative or comparative language, price information, or other indications of savings or value
- Endorsements
- Inducements to purchase, sell, or use the products or services
The bottom line is, nonprofit organizations should only publicize, never promote, the sponsor and its products; they should give them publicity, but not actively promote them or their products over their competitors.
Still unclear on what would render a sponsorship payment taxable unrelated business income? Contact your accounting professional.
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