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Taxable Advertising or Nontaxable Sponsorship?

Apr 15, 2024

Associations often have publications, such as a monthly magazine or newsletter, designed to keep members up to date on industry developments and trends. These publications often contain advertising spots designed to market industry-related products and services to the members of the Association. Although there are some exceptions, when an Association generates advertising income in this manner, it is typically considered Unrelated Business Income (UBI) under the Internal Revenue Code (IRC) and potentially exposes the Association to a tax liability on net advertising income.

In addition to publications, Associations also generate “advertising-ish” or sponsorship payments in other settings, such as educational meetings or annual conferences. The question is: How do we determine if these arrangements result in advertising income that is considered UBI and taxable or qualified sponsorship payments (QSP) that are to be excluded statutorily from UBI?

IRC Section 513(i)(1) defines a QSP. Specifically, a QSP is a payment by an entity engaged in a trade or business to an exempt organization without an arrangement or expectation that the sponsor will receive a substantial return benefit. This is the only requirement. Therefore, when an Association determines the proper tax treatment for these payments, it must consider characteristics attributed to a “substantial return benefit” by the IRC. Characteristics attributed to a “substantial return benefit” by the IRC include:

  • Includes advertising as defined in Reg. 1.513-4(c)(2)(v).
    • Sponsor acknowledgments that actively promote the sponsor’s products, contain qualitative or comparative language, price information, or an inducement to purchase, sell, or use the sponsor’s products or services may be a substantial return benefit.
    • A substantial return benefit does not include the Association’s use or acknowledgment of the sponsor’s name, logo, or product lines in connection with its activities (for example, at a conference). The Association is also allowed to mention or display the sponsor’s location, telephone number, internet address, logo, slogans, and value-neural descriptions of the sponsor’s goods or services.
  • Includes an exclusive provider arrangement.
    • An arrangement that limits the sale, distribution, availability, or use of competing products, services, or facilities
    • An exclusive provider arrangement is not the same as an exclusive sponsorship of an activity – exclusive sponsorship may be acceptable.
  • Includes a provision of facilities, services or other privileges to the sponsor or persons designated by the sponsor.
    • A de minimis exception allows the Association to provide benefits to the sponsor when the fair market value of those benefits is not more than 2% of the sponsor’s payment.
  • Includes a grant to the sponsor or persons designated by the sponsor an exclusive or nonexclusive right to use an intangible asset, such as a trademark, patent, log or designation of the exempt organization.
    • Although it may not be a QSP, other statutory exclusions from UBI, such as passive royalties, may be applicable in these arrangements.

Associations rely on sponsorship payments to fund critical member programs effectively. By carefully planning and structuring these opportunities to qualify as nontaxable Qualified Sponsorship Payments (QSPs), your organization can access a tax-efficient funding source.

Are you looking to enhance your Association's financial strategies? Reach out to your CRI advisor today. Our experts will help you explore how QSPs can support your programs without the tax implications and guide you every step of the way in optimizing your funding structure. Let CRI assist you in navigating the complexities of QSPs and charting the best course for your Association’s future.

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