Organizations often enter into sponsorship agreements with different businesses within their communities to help support the cost of programs and events. For an organization that is tax exempt under section 501(c)(3) of the U.S. Internal Revenue Code, it is important for the organization to understand the terms of each agreement to help it determine its exposure to taxable unrelated business income (UBI).
The key issue with respect to sponsorship agreements is whether a payment received is considered "Advertising" or a "Qualified Sponsorship Payment". Advertising is taxed as unrelated business income, while qualified sponsorship payments are not subject to tax.
Often, a business will place a logo with a link to their website on an exempt organization’s home page. Generally, this does not subject the revenue to tax unless the link goes directly to a page that has quality comparisons, price comparisons, or a call to action. These arrangements should be reviewed carefully and monitored regularly.
The differences between an agreement that is considered advertising and one that is treated as a qualified sponsorship payment can be very subtle. It is important that you review your sponsorship agreements to identify, and properly address, any potential UBI issues.