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Volume
6, Issue 5 - September 2004 |
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"I
love your newsletter! It's refreshing, fun
and filled with helpful hints"
Toni Paglia,
Director of Development, The ARC
Syracuse, New York |
|
What You Need to Know About
Sponsorships and Ads |
Many of us have relied heavily on sponsorships and ads to support our
special events, newsletters, etc. Here is what you should know about the
potential of Unrelated Business Income Tax.
Advertising and sponsorship payments should be carefully reviewed to
determine if these payments are subject to unrelated business taxable income (UBTI).
First let’s agree that having UBTI is allowable by a nonprofit organization, as
long as the nonprofit properly reports this income on Form 990-T and does not
allow this activity to become a substantial part of the activities of the
nonprofit. Unrelated business activities are subject to income tax similar to a
for-profit organization.
This article will focus on advertising and sponsorship payments
only. There are complex rules regarding unrelated business activities,
exclusions, reporting, etc. As with most tax and accounting issues, a nonprofit
should consult with tax and accounting professionals regarding all possible
unrelated business activities.
The Internal Revenue Service defines an unrelated business activity as
any trade or business that is regularly carried on and the conduct of which is
not substantially related to the exercise or performance of the nonprofit’s
exempt purpose. There are no clear rules regarding unrelated business activity
definitions and what may be an unrelated business activity for one organization
may be a related activity for another. Furthermore, it does not matter how the
income is used. The key in evaluating UBTI activities is how the income is
obtained. Let’s first review sponsorship payments.
“Qualified sponsorship payments” (QSPs) are excluded from unrelated business
taxable income. QSPs are payments made without an arrangement or expectation of
substantial return benefit from the recipient nonprofit organization. Therefore,
it is critical to determine what your nonprofit is providing in return for the
sponsorship payment. If the services required by your nonprofit are substantial,
the payment will not be a QSP.
Two benefits provided by your nonprofit are considered to be insubstantial
and, therefore, would exclude the payment from UBTI. First, you can express your
appreciation for the payment as long as the appreciation does not fall into the
category of advertising. For example, your nonprofit can use the following to
acknowledge a sponsor’s support: the sponsor’s logo, locations, telephone
number, value-neutral descriptions of the sponsor’s products or services, the
sponsor’s brand trade names and product or service listings. A message is
considered advertising if contains qualitative or comparative language, price
information, or an endorsement. You can also distribute the sponsor’s products
to persons attending the sponsored event. Your nonprofit, however, cannot cross
the line to advertising for the sponsor.
Secondly, the sponsor may receive goods or services that have an aggregate
fair market value of not more than 2% of its payments. If the fair value exceeds
the 2% limit, the entire value of the substantial return benefits is potentially
taxable to the nonprofit.
Another issue that may come into play with sponsorship payments is the
exclusive provider issue. The fact that a sponsor is the exclusive provider of
products at an event does not constitute a substantial return benefit. However,
any arrangement that limits the sale, distribution, availability, or use of
competing products or services generally will result in a substantial return
benefit. Furthermore, qualified sponsorship payments cannot be contingent upon
the level of attendance at an event or similar factors.
The Internet also becomes a factor in evaluating sponsorship payments. A
hyperlink can be considered either an acknowledgement or advertising subject to
UBTI. An acknowledgment occurs when a nonprofit simply provides the sponsor’s
Internet address as a hyperlink. However, if the hyperlink provides an
endorsement, the endorsement is advertising and subject to UBTI.
In evaluating advertising activities (without the factor of sponsorship
payments), advertising revenue that meets the definition of an unrelated
business activity is subject to unrelated business tax. Advertising does not
lose its identity as a commercial type of activity simply because it is in a
nonprofit newsletter or periodical. However, as outlined above in reviewing
sponsorship payments, it is important to distinguish advertising from
acknowledgements, which are not subject to UBTI. Therefore, if a nonprofit
simply acknowledges the receipt of a donation in a newsletter or periodical,
this is not considered advertising.
If your nonprofit organization is evaluating advertising and sponsorship
payments for potential unrelated business tax issues, the following are general
rules to consider:
-
Is the advertising a mere acknowledgement or does it endorse
a product or service? To avoid UBTI, you can only acknowledge a donation or
sponsorship payment.
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What is your nonprofit organization required to do in return
for the sponsorship payment? If your nonprofit is having to provide
substantial return benefit to the sponsor, the payment will be subject to
unrelated business taxable income.
These are general areas of concern. You should consult your tax and
accounting advisors for detailed examination of these activities.
Many thanks to Kim McNulty, CPA for contributing this
article.
McNulty Zahm, LLC, was formed in January 2002 by Kim
McNulty, CPA and Maggie Zahm, CPA. Kim McNulty heads up the firm’s
assurance services which focus on providing nonprofit organizations with
quality services. Nonprofit accounting currently comprises 97% of the
firm’s assurance and consulting clients. Kim McNulty has been working in
public accounting for 17 years and has spent the past 10 years
specializing in services to nonprofit organizations.
Email: kim@mz-cpa.com
Phone: 505.830.9446
Back to Table of
Contents
And speaking of sponsorships and fundraising, here’s a paradigm
shift— reach for your headache medicine— I’m going to stretch you to think
outside the box!
Instead
of thinking about how much you need in sponsorships for an event or program
or service, think in terms of the product you have to deliver. For
example, clearly define who attends your event, how many
attend the event, what the attendees represent. Then, think about who
wants or needs to get their product or service in front of the event
attendees. Develop a clear list of benefits to the sponsor to taking
advantage of the opportunity you have for him to use your event to meet his
marketing or business development needs. Then, build a list of targets and
present the opportunity.
Instead of thinking about how much money you need to
underwrite a particular program or service, think about who it will
benefit, how many it will benefit, and who might want to be
associated with the beneficiaries or the results of the program or
service. Develop a list of benefits and targets for the opportunity you can
provide.
This shift from the usual focus and emphasis on what you
need to a focus and emphasis on what the
sponsor/investor/donor/underwriter needs is simply savvy marketing.
Take the You:Me test, where You is the donor
and Me is you, the nonprofit. Look at something you’ve written that
asks for money. In one color of ink, circle the number of times you have
described the benefit to the donor or underwriter. In another color, circle
the number of times you have spoken about yourself and your needs. Clearly,
the focus should be on the donor not on you, if you want to present
benefits and opportunities.
Back to Table of
Contents
If you are looking for signed sports memorabilia for an upcoming event, you
might want to take a look at
www.signevents.com. Looks to me like they offer you signed stuff on
consignment and you keep whatever you raise above the consignment price.
Check out
www.onphilanthropy.com for some great articles on nonprofit
management, fundraising and other resources.
Speaking in generalities, if you aren’t spending a portion of your time
every week surfing the Internet, you are likely to be leaving opportunities
on the table. Try entering a few key words in the search engine (Google is
my favorite) , load paper in your printer and “hang ten” for a while to see
where you end up. I have discovered some incredible resources for my
favorite nonprofit organizations this way—everything from in-kind resources
to capital campaign resources to volunteer management resources.
Lots of the sites I’ve found are hot linked from my web site. Of course,
from time to time, organizations and sites disappear, so if you find a
broken link on the site, please send me an email ()
and let me know. Thanks!
Found any other great Internet resources you’d like to share? Send them to
me!
Back to Table of
Contents
Now you can add two great books to your agency library.
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Email me at
to
discuss volume discounts for staff or volunteers.
Order Now So You Don't Forget
Go to the Order Form to order your copies of
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HOW CAN I HELP YOU?
TAKE THIS QUICKIE QUIZ
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Please give me a call if you want to turn any NO into a YES. I can help
with:
- turning your Board into a dynamic group of volunteers,
- facilitating a strategic planning session,
- analyzing your current fundraising and suggesting some new ideas, and
- training volunteers and staff in becoming more effective fundraisers.
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Here is what people have said about my training and facilitation:
"I attended your workshop in St. Louis
and left there feeling so uplifted by your motivation. Your training - to
make us all savvy marketers - has paid off. Even in this economy, our
underwriting is up and our auction donations have blown away everyone in
town! We simply feel empowered to ask anyone and everyone AND to tell them
WHY we are their market. It's working!
Thank you!"
Kirsten Wagmeister
Junior League of Evansville
"Jean conducted an extremely well
organized and productive [Board] retreat, one that I can
say with confidence that our members count as the finest
ever conducted for us. Jean's follow-up report was
in-depth and meaty, and both Board and staff have
referred to it time and again. The knowledge of
boardsmanship the members took with them has made a
remarkable difference in their levels of commitment and
support."
Eileen Cook, Executive Director
Casa Esperanza
"Jean Block is a powerhouse in the
Non-Profit world. You don't move about these circles long before her name is
prominent in the conversation. Her commitment to training, fundraising,
motivating, and cultivation is unsurpassed. To say she is an influence is
to miss the point. She gives new meaning to the word enthusiasm! You don't
know Jean, you experience her! She is a force unlike any other I have every
met."
Randy Gleason
Randy
Gleason Consulting, Inc.
"I attended the Corporate
Sponsorship Workshop - WOW! You were amazing! What an OPPORTUNITY for me!
Your presentation style was EXCELLENT. By
far the best workshop I've been to in a long time (content and style
both!)."
Vicki
Kopplin
Epilepsy
Foundation of Minnesota
Jean Block
Consulting, Inc.
7915 Cliff Road NW
Albuquerque NM 87120
(505) 899-1520
Fax (505) 890-5285
Email:
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"I
love your newsletter! It's refreshing, fun
and filled with helpful hints"
Toni Paglia,
Director of Development, The ARCRC
Syracuse, New York |
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