Tax Issues for Non-Profit Organizations to Consider

These days, many non-profit associations are exploring new ways to increase funding to support their missions. One method of achieving additional funding is by establishing alliances with the private sector by offering corporate sponsorships. However, before these corporate alliances are formed, association management and leadership must understand the potential tax consequences created by offering sponsorships or similar opportunities to private sector organizations.

From a tax perspective, non-profits should keep two goals in mind when structuring relationships with corporate sponsors:

• Where possible, avoid earning taxable “unrelated business income,” and
• Avoid conferring impermissible “private benefits” on private sector organizations.

Non-profit organizations are generally tax exempt regarding “related” income or income derived from activities that contribute importantly to the accomplishment of an organization’s taxexempt mission. However, nonprofits are subject to “unrelated business income tax” (UBIT) on income derived from an “unrelated trade or business.” This raises the question of whether corporate sponsorships are “related” or “unrelated” income. To answer this question, Congress, in 1997, enacted a new “safe harbor” that excludes from UBIT “qualified sponsorship payments.” A “qualified sponsorship payment” is a payment in exchange for which the corporate sponsor neither receives nor expects any return benefit other than:

• Goods or services, or other benefits, the total value of which does not exceed two percent of the sponsorship payment, or
• Recognition (such as use or acknowledgment of the sponsor’s name, logo, or product lines in connection with the nonprofit’s activities).

“Qualified sponsorship payments” would include, for example, amounts received from a corporate sponsor for:

• Displaying the sponsor’s logo on signage at an association event
• Describing the corporate partner as “the exclusive sponsor” of an exhibit or conference in a brochure about the event, or
• Including the sponsor’s name and logo in newspaper or magazine ads about an event.

It’s important to note that the “qualified sponsorship payments” safe harbor does not apply to acknowledgments of corporate support appearing in a nonprofit’s “regularly scheduled and printed material,” such as monthly newsletters or magazines. From the IRS perspective, this could be viewed as “advertising income” and an impermissible “private benefit”.

“Advertising income” may be generated not only by traditional ads featuring product displays, but also by innocuouslooking “acknowledgments” of a corporate sponsor’s support.

Of course, some level of endorsement is implied whenever a nonprofit allows use of its name and logo in connection with a commercial product. Common instances of this can be found on nonprofit websites which provide links to a corporate sponsor’s website. By itself, this kind of “endorsement” does not give rise to taxable services income as long as the nonprofit does not imply that the listed corporate sponsor’s products or services are superior compared to other competing vendors. On the other hand, if an endorsement provides comparative information about the sponsor’s product, such as commenting on a product’s low price, high value, or superiority to competing products, there could be an impermissible “private benefit.”.

Corporate sponsorships provide an excellent opportunity for non-profit associations to raise funds to support longterm and short-term activities that are within the scope of their overall mission. To minimize any potential tax burdens that may be associated with sponsorships, non-profit associations should be sure to consult their tax advisors and general counsel before implementing a sponsorship program.

For more information, please see the IRS charities and nonprofits website at: http://www.irs.gov/charities/.

Disclaimer: Note that no information contained herein is intended to be construed as legal advice. You should consult your legal counsel prior to taking any actions prompted by the information contained herein.