Is It Advertising or Sponsorship?

By: Laura Kalick

The IRS treats revenue from advertising and sponsorship differently. Understand the distinction so you're sure to stay in compliance with tax laws. [Titled "And Now, A Word About Sponsors" in the print edition.]

Even in this digital world, old-fashioned corporate sponsorships are still a major source of revenue at association conventions. But is it taxable? The answer depends on what the sponsor gets in return.

The Internal Revenue Code provides a safe harbor from the unrelated business income tax (UBIT) for "qualified sponsorship payments" (QSPs). In a QSP, the sponsor receives no "substantial return benefit" other than acknowledgment, or it receives insubstantial benefits where the return is not more than 2 percent of the amount the sponsor paid to the association. However, where a sponsor receives advertising, those amounts will usually be taxed as unrelated business income.

Even if a sponsor receives a substantial return benefit, the payment may not be subject to UBIT if the benefit is related to the association's tax-exempt purposes, such as tickets to an organization's events, or is otherwise excluded from taxes (a royalty payment, for example, or activities that fall under the qualified tradeshow exception).

What is acknowledgment? A sponsor's payment can be treated as a QSP if the sponsor is merely acknowledged. According to IRS regulations, acknowledgment may include "exclusive sponsorship arrangements; logos and slogans that do not contain qualitative or comparative descriptions of the payor's products, services, facilities, or company; a list of the payor's locations, telephone numbers, or internet address; value-neutral descriptions, including displays or visual depictions, of the payor's product line or services; and the payor's brand or trade names and product or service listings."

What is advertising? Advertising is a substantial return benefit. It is, of course, promotional in nature and, according to the regulations, "includes 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 any company, service, facility, or product." If a message contains both advertising and acknowledgment, the IRS considers the entire message to be advertising.

What about the web? For web-based sponsorships, a link to the sponsor's website and its name on the association's site are acknowledgment, not advertising. However, an association endorsement of the sponsor or its products, on either organization's website, is considered advertising.

Sponsorships are a great source of funds, so even if UBIT applies, it is better to make additional revenue and pay the tax than not to have the revenue at all.

Laura Kalick is director of nonprofit tax consulting at BDO in Bethesda, Maryland. Email: [email protected]

Laura Kalick

Laura Kalick, JD, LLM, is director of nonprofit tax consulting at BDO in Bethesda, Maryland.