When Does Sponsorship Income Become Advertising?

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imageby John Keller, CPA and Amanda Meko, CPA | Team Members of the Not-for-Profit Services Group

Sponsorships can be mutually beneficial to both the organization and its sponsor. The organization gets funding for its event while the sponsor can use the event as a platform to gain more public exposure. The sponsor can have its name, logo, website address or telephone number prominently displayed at the event and even can sell its products at the event (as long as sales are not conducted by the organization itself).

The written sponsorship agreement sets the terms of payment and the obligations the organization has to fulfill in recognizing the sponsor. If the terms satisfy the IRS rules for Qualifying Sponsorship Payments (QPS) then none of the revenue generated will be considered Unrelated Business Taxable Income (UBTI).An organization, however, must carefully consider what it is promising to perform in the sponsorship agreement as the line between QSP and UBTI can be blurry.

An intended QSP becomes advertising subject to UBTI when:

  • Sponsor recognition contains any of the following:
    • Pricing information
    • A call to purchase (“go buy a product from X today!”)
    • An endorsement of the sponsor products including qualitative statements (“X’s product is terrific!”)
    • Comparative language (“X’s product does not have the problems as the product of Y”)
  • The sponsorship agreement entitles the sponsor to have its name, logo and product lines used in the organization’s periodicals. UBTI will result, even if there is no disqualifying language included in the message(IRC Sec 513(i)(2)(B)(ii)(1)).

Periodicals are defined as any regularly scheduled printed (or electronic) material not distributed in connection with a specific event. “Entitles” means that the acknowledgment in the periodical is required in the written sponsorship agreement as a condition of the sponsorship payment.

Simply recognizing a sponsor in an event program is fine, but the same recognition in a quarterly newsletter can result in UBTI.

  • The amount of the sponsorship payment is contingent on level of event attendance, broadcast rating or other factors indicating the degree of public exposure.

If the sponsorship is deemed to contain a component of advertising, then the organization has to report taxable revenue to the extent of the fair market value of the advertising. Any amount of the sponsorship payment above the fair market value of the advertising would still be considered a QSP and non taxable.

UBTI can be avoided by using careful language when both recognizing a sponsor at an event and in drafting the sponsorship agreement.