The Difference Between Advertisers and Sponsors — and Why
You Should Care
The distinction between advertising and sponsorship income
is extremely important, since net advertisement revenue is generally subject to
the unrelated business income tax (UBIT), while sponsorship revenue is
tax-free. Here’s how to make the distinction less confusing.
By Nancy Ortmeyer Kuhn
The revenue received by nonprofit organizations, including associations,
must be classified as either income related to the organization’s exempt
purposes and exempt from tax, or as unrelated business income and taxable. Many
times, that distinction is difficult to make.
Simply put, the revenue from a for-profit business paid to
an association is either the purchase of advertisements to support the
for-profit business or sponsorship revenue to support the association. The
distinction is extremely important, since net advertisement revenue is generally
subject to the unrelated business income tax (UBIT), while the sponsorship
revenue is tax-free.
Furthermore, even if the association determines that the
revenue is a sponsorship, the IRS may not agree. Therefore, it is essential
that the advertisement agreement or the sponsorship agreement clearly set forth
the expectations of both parties.
Sponsorships—No Specific Benefit Allowed
A corporate sponsorship is defined as a payment received by
a nonprofit for the purpose of sponsoring that nonprofit’s activities. The
corporate sponsor receives an acknowledgement for the sponsorship, rather than
any promotion of its services or products.
Corporate sponsorships are excluded from the general rules
of unrelated business income and are exempt from tax. A qualified sponsorship
payment is any payment from a business to a nonprofit where there is no
substantial return benefit. The law defines substantial return benefit as a
benefit that is more than a mere acknowledgement that the corporation provided
funds to the association.
However, if the corporate sponsor receives benefits in
return for its sponsorship payment that amount to more than 2 percent of the
sponsorship payment, then the entire amount of the payment will be UBIT,
assuming it is from an unrelated, regular business activity of the association.
Benefits provided to the corporate sponsor include
advertising, rights to use the nonprofit’s intangible property including
mailing or membership lists, use of facilities, an exclusive provider
arrangement (e.g., the nonprofit will sell only the products of the corporate
sponsor), and other privileges provided to the sponsor that are not provided to
the general public.
Advertising income compensates the association for services
it provides to the corporation, including the association’s promotion of the
corporation’s goods and services. Net advertising income is generally subject
The term advertising means any message or programing
material, which is broadcast or otherwise published, that promotes any
business, service, facility, or product. The term includes messages containing
qualitative or comparative language; price information or other indications of
savings or value; and an endorsement or an inducement to purchase, sell, or use
any company, service, facility, or product.
Advertising income may escape taxation if the economic
activity is not regularly carried on or if the economic activity is carried on
only by volunteers. For example, advertising revenue accepted in connection
with an event that is held only once would not result in UBIT. Also, if the
advertising is accepted in connection with an event organized and operated by
volunteers, the revenue would not be subject to UBIT. Another exception is if
the advertising is related to the association’s exempt purpose.
The corporate sponsorship exception for acknowledgements is
generally not available for regularly published periodicals, including online
publications. Even a mere acknowledgement is still advertising. However, in a
ruling issued in 2003, the IRS stated that an online banner with just the
corporation’s name is not advertising. The key distinction is whether the
corporate acknowledgement is part of an online periodical or just a link. If
just a link, then it may qualify as a corporate sponsorship. However, if the
link takes the reader to an endorsement from the association on the
for-profit’s website, then that revenue will be classified as advertising
Bottom line: The understanding of corporate sponsorships versus
advertising is filled with unexpected twists and turns, so consult Treasury regulations or a tax professional for
Ortmeyer Kuhn is
director and partner of Washington, DC-law firm Jackson & Campbell. This
article is not intended to be legal advice, and the comments are general in
nature. The specific facts of any situation must be separately analyzed and
classified accordingly. The full article on this topic appears in the
July/August 2014 issue of Signature magazine.