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Friday, September 13, 2013

Unrelated Business Income (UBI) and Sponsorships

Posted by Armanino Nonprofit Team

We received a few questions regarding Sponsorships during our webinar presentation on September 5th entitled: “Unrelated Business Income (UBI): Navigating the Changing Landscape” (click here to view the replay of this webinar). I’d like to provide a bit more detail on this topic.

Qualified Sponsorships has really evolved over the years. In 1993, proposed regulations were issued addressing the difference between donor acknowledgements and actual advertising. In 1997, code Sec. 513(i) was added providing an exemption for Qualified Sponsorship Payments. So, it is not uncommon for a business to sponsor a charitable event. This payment to the organization is not UBI if it meets the definition of a “qualified sponsorship payment”, which is defined as a payment (could be in money, property or services) by the sponsor without an “arrangement or expectation” that the sponsor will receive any “substantial return benefit.” Basically, the business is giving money out of the goodness of its heart expecting nothing in return.

To be excluded from the definition of UBI, the sponsor can’t receive advertising, an exclusive provider arrangement (exclusive sponsor agreement generally okay if no advertising), goods, facilities, services or other privileges. If the exempt organization just uses or acknowledges the sponsor’s name, logo or product lines this is okay- since not a substantial return benefit. If a sponsor makes a payment contingent on the level of attendance of an event, this falls out of the definition of a QSP.

There is a de minimis rule if benefits received by a sponsor are valued at not more than 2% of the amount of payment, the value of the benefit is ignored. If valued in excess of 2%, then the benefit must be valued (and would be unrelated business income). Make sure sponsorship agreements are clear and concise. If there is a substantial return benefit, identify what it is and the value.

On a side note…how does a charitable organization report a QSP? It is considered public support and enters into the related calculations (even though the sponsor might deduct as a trade or business expense).

What about links on an organization’s website to a sponsor’s website? The regulations provide examples. For example, a sponsor’s internet address appears on a symphony’s website in the form of a hyperlink to the sponsor’s website. The symphony’s website does not promote the sponsor or advertise its products. The regulations say this is a QSP so the hyperlink does not constitute a substantial return benefit.

Another example in the regulations is similar but the organization endorses the use of a sponsor’s product on its website. This results in a substantial return benefit to the donor and the value would be reported as advertising revenue. In the real world, such agreements are not always clear and concise.

As always, with any topic as complicated as UBI, we suggest you contact your tax professional.

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