Qualified sponsorship payments and advertising income: analyzing unrelated business taxable income.

• Author: Schuster, Steven

Determining whether receipts qualify as sponsorship payments or advertising income can be quite burdensome for most nonprofit organizations. If not structured properly, the impact of unrelated business taxable income will adversely affect the organization's cashflow. Following a few simple steps can save the organization money in both taxes and filing fees.

Typical nonprofit organizations seek to obtain funding to carry on their exempt purpose through a variety of means, some of which may include annual banquets, charity walks, or the sale of raffle tickets. Many times the organizations will try to cover the costs for their annual events with the help of local businesses, either through the use of business facilities and equipment or through qualified sponsorship payments. Listing businesses in brochures or providing name recognition on the 18th hole of an annual golf tournament can bring in a considerable amount of money for an organization. It is important to understand how a qualified sponsorship payment distinguishes itself from advertising income and the exploitation of the organization's exempt purpose, leading to an unrelated trade or business.

The definition of an unrelated trade or business in Regs, Sec. 1.513-1 states that the conduct of any trade or business that is not substantially related to the organization's exempt purpose (charitable, educational, etc.) will be subject to the tax imposed by Sec. 511. An activity subject to the tax imposed by Sec. 511 is includible in the computation of unrelated business taxable income if:

* It is income from a trade or business;

* The trade or business is regularly carried on by the organization; and

* The conduct of the trade or business is not substantially related to the organization's performance of its tax-exempt function.

All three must apply for an activity to constitute an unrelated trade or business. These definitions arc key to determining whether an activity qualifies as a trade or business.

Secs. 162 and 513 define a trade or business, which is essentially any activity carried on with the intent to make a profit through the sale of goods or performance of services. The imposition of the unrelated business income tax was to ensure that nonprofit companies would not unfairly compete with for-profit companies by avoiding tax consequences. A trade or business activity does not lose its identity simply because it does not make a profit.

For a nonprofit organization that solicits...