Corporate Sponsorship and UBIT for Nonprofit Organizations

In this article we will discuss the issue of Unrelated Business Income Tax (UBIT) in relation to corporate sponsorships for nonprofit organizations.

Under the Internal Revenue Code (IRC Sec. 513), Qualified Sponsorship Payments are not subject to UBIT. These payments refer to money, property transfers, or services provided by a business without expecting any substantial return benefit in exchange. However, some corporate sponsorships do not qualify, potentially leading to UBIT liability for the organization.

Unrelated Business Income Tax (UBIT) is a tax imposed on income generated by nonprofit organizations from activities that are unrelated to their primary exempt purpose. Under the Internal Revenue Code, Qualified Sponsorship Payments are not subject to UBIT. These payments refer to money, property transfers, or services provided by a business without expecting any substantial return benefit in exchange. However, if a sponsor receives substantial return benefits beyond acknowledgments, such as advertising, goods, facilities, services, rights to the nonprofit's trademark or logo, or exclusive provider arrangements, UBIT may apply. The purpose of UBIT is to prevent nonprofit organizations from unfairly competing with for-profit businesses by engaging in commercial activities that do not further their exempt purpose or mission.

Qualified Payments

Qualified sponsorship payments can fund various activities, including single events, a series of related events, ongoing activities, or continuous support of the nonprofit's operations. These payments do not need to relate to the nonprofit's exempt purpose. However, if the sponsor receives substantial return benefits beyond acknowledgments, such as advertising, goods, facilities, services, rights to the nonprofit's trademark or logo, or exclusive provider arrangements, UBIT may apply.

Exclusivity

Exclusive sponsorships are allowed, but the nonprofit cannot exclude or limit a competitor's products at a sponsored event. If a sponsor receives a substantial return benefit, only the amount exceeding the benefit's fair market value (FMV) is considered a qualified sponsorship payment. Payments contingent on public exposure, such as event attendance or broadcast ratings, are not qualified sponsorship payments. Payments related to convention or trade show activities, or those entitling the sponsor to use its name or logo in regularly scheduled periodicals, are also excluded. If part of a payment is qualified and part is not, the IRS treats the portions as separate payments.

Acknowledgments

Acknowledgments can include the sponsor's logo, slogans, brand or trade names, locations, phone numbers, product service listings, and value-neutral descriptions of its product line or services. An acknowledgment can link to the sponsor's website, provided it directs to the home page and not to a specific webpage. Comparative or qualitative descriptions, price information, indications of savings or value, endorsements, or inducements to buy, sell, or use the sponsor's products or services should be avoided. Displaying or distributing a sponsor's product at a sponsored activity is typically not considered an inducement.

Conclusion

Corporate sponsorships are crucial in providing necessary financial support to nonprofit organizations. It's important to understand the implications of UBIT to avoid unexpected tax liabilities. To ensure compliance, organizations should only acknowledge corporate sponsors and refrain from offering substantial returns such as advertising placements. For more details on differentiating between qualified and nonqualified sponsorship payments, contact us.