GAIN INSIGHT: SPONSORSHIPS VS ADVERTISING berrydunn.com GAIN CONTROL
AGENDA Unrelated Business Income Qualified Sponsorships Donation Compliance Defining Political Activity 2
UNRELATED BUSINESS INCOME Eliminate a source of unfair competition by placing the unrelated business activities of an EO on the same tax basis as the nonexempt business endeavors with which they compete. Form 990-T required if gross income > $1,000 (gross receipts less cost of goods sold) Tax calculated using graduated corporate rates which start at 15% and can be high as 34% May also trigger state taxation (ME, NH, VT, MA, etc.) 3
UNRELATED BUSINESS INCOME An organization may be subject to tax if it is carrying on an activity that is: Trade or business Regularly carried on Not Substantially Related to Exempt Purpose All three must be met before the activity is subject to tax. 4
TRADE OR BUSINESS The term "trade or business" includes any activity which is carried on for the production of income from the sale of goods or the performance of services. Must implicitly attach a profit motive, but profitability is not a prerequisite. 5
REGULARLY CARRIED ON A trade or business ordinarily is deemed regularly carried on if it manifests a frequency and continuity and is pursued in a commercial manner. There is no set guide as to what constitutes frequent and continuous operation to make an activity regularly carried on. Determination is based on the facts and circumstances of each activity. 6
SUBSTANTIALLY RELATED An activity is considered not substantially related if it does not contribute importantly to accomplishing the exempt purpose of the EO Note: production of funds not considered related Depends in each case on the facts involved. The size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function they intend to serve. 7
EXCLUSIONS There are three General Exclusions from UBI, the third of which only applies to 501(c)(3) organizations and governmental colleges and universities. All work performed by volunteers Selling donated merchandise Convenience of members, students, patients, officers, or employees 8
EXCLUSIONS Dividends, Interest, Annuities and other Investment income Royalty Income, except for royalties received from a controlled corporation Rental income From real property Mixed lease: >10% rental from personal property, then taxable Rents based on net profits are taxable If debt-financed property, then possibly taxable 9
EXCLUSIONS In addition, there are several specific exclusions including: Qualified convention or trade show activity Fairs & Expositions Hospital services Bingo games Qualified sponsorship payments Distribution of low cost articles Exchange or rental of member lists 10
ADVERTISING Sale of advertising will be considered UBI in: journals periodicals membership directories, or any publication reaching a wide variety of readers if the advertising does not bear directly on the exempt purpose of the organization (including websites) 11
QUALIFIED SPONSORSHIP Any payment by any person engaged in a trade or business with respect to which there is no arrangement or expectation that the person will receive any substantial return benefit. Payment includes the payment of money, transfer of property, or performance of services. 12
QUALIFIED SPONSORSHIP Certain benefits disregarded: Disregard if aggregate fair market value (FMV) of all benefits provided to the payor is not more than 2% of the amount of the payment. If FMV > 2%, then entire FMV of such benefits deemed a substantial return benefit. Qualified sponsorship = Payment FMV of substantial return benefit 13
QUALIFIED SPONSORSHIP Benefits defined: Advertising Exclusive provider arrangements Goods, facilities, services or other privileges Exclusive or nonexclusive rights to use an intangible asset of the EO (trademark, patent, logo, designation) 14
QUALIFIED SPONSORSHIP Substantial return benefit does not include: use or acknowledgment of the name, logo or product lines of the payor's trade or business exclusive sponsorship arrangements logos and slogans that do not contain qualitative or comparative descriptions of the payor's products, services, facilities a list of the payor's locations, telephone numbers, or internet address, brand or trade names, and products or services value-neutral descriptions, including displays or visual depictions, of the payor's product-line or services 15
QUALIFIED SPONSORSHIP Logos or slogans that are an established part of a payor's identity are not considered to contain qualitative or comparative descriptions. Mere display or distribution, whether for free or remuneration, of a payor's product by the payor or the EO to the general public at the sponsored activity will not affect the determination of whether a payment is a qualified sponsorship payment. 16
QUALIFIED SPONSORSHIP Advertising includes: messages containing qualitative or comparative language, price information or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use any company, service, facility or product A single message that contains both advertising and an acknowledgment is deemed all advertising 17
QUALIFIED SPONSORSHIP Exclusivity arrangements: a. Exclusive sponsor: An arrangement that acknowledges the payor as the exclusive sponsor of an EO's activity does not, by itself, result in a substantial return benefit. b. Exclusive provider: An arrangement that limits the sale, distribution, availability, or use of competing products, services, or facilities in connection with an EO's activity generally results in a substantial return benefit. 18
QUALIFIED SPONSORSHIP Fair market value: The price at which the benefit would be provided between a willing recipient and a willing provider of the benefit, neither being under any compulsion to enter into the arrangement and both having reasonable knowledge of relevant facts, and without regard to any other aspect of the sponsorship arrangement. 19
QUALIFIED SPONSORSHIP Contingent payments: Qualified sponsorship payments do not include any payment which is contingent, by contract or otherwise, upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to the sponsored activity. The fact that a payment is contingent upon sponsored events or activities actually being conducted does not cause the payment to fail to be a qualified sponsorship payment. 20
EXAMPLES Please note: In the following examples, the tax treatment of any payment (or portion of a payment) that does not constitute a qualified sponsorship payment is governed by general UBIT principles. 21
EXAMPLE M charity organizes a marathon where: M serves drinks and other refreshments provided free of charge by a national corporation. Corporation gives M prizes for winners. M lists the corporation's name in promotional fliers, newspaper ads and on T-shirts worn by runners. M changes the name of its event to include the name of the corporation. 22
ANSWER M's activities constitute acknowledgment of the sponsorship. The drinks, refreshments and prizes provided by the corporation are a qualified sponsorship payment, which is not income from an unrelated trade or business. 23
EXAMPLE N art museum organizes receives a large payment from a corporation to help fund an exhibition. N uses the corporate name and established logo in materials publicizing the exhibition, including banners, posters, brochures and public service announcements. N also hosts a dinner for the corporation's executives. FMV of the dinner exceeds 2% of the total payment. 24
ANSWER N's use of the corporate name and logo in connection with the exhibition constitutes acknowledgment of the sponsorship. However, because FMV of the dinner exceeds 2% of the total payment, the dinner is a substantial return benefit. Only that portion of the payment, if any, that N can demonstrate exceeds the FMV of the dinner is a qualified sponsorship payment. 25
EXAMPLE O coordinates sports tournaments for local charities & an auto manufacturer underwrites the expenses. O includes the manufacturer's name and logo in the title of each tournament as well as on signs, scoreboards and other printed material. Manufacturer receives complimentary admission passes and pro-am playing spots for each tournament that have a combined FMV in excess of 2% of the total payment. O displays the latest models of the manufacturer's premier luxury cars at each tourney. 26
ANSWER O's use of the manufacturer's name and logo and display of cars in the tournament area constitute acknowledgment of the sponsorship. However, the admission passes and pro-am playing spots are a substantial return benefit. Only that portion of the payment, if any, that O can demonstrate exceeds the FMV of the admission passes and pro-am playing spots is a qualified sponsorship payment. 27
EXAMPLE P conducts an annual televised college football bowl game. A major corporation is exclusive sponsor of the bowl game for $1 mill. Name of the bowl game includes corporation s name. Corporation's name & logo are on player's helmets, uniforms, scoreboard, stadium signs, playing field, drink cups, and on all related printed material distributed in connection with the game. P gives corporation game passes for its employees (FMV $6k) and includes advertising in the bowl game program book (FMV $10K). Agreement is contingent upon the game being broadcast on television and radio, but the amount of the payment is not contingent upon the number of people attending the game or the television ratings. Contract provides that television cameras will focus on the corporation's name and logo on the field at certain intervals during the game. 28
ANSWER P's use of the corporation's name and logo in connection with the bowl game constitutes acknowledgment of the sponsorship. The exclusive sponsorship arrangement is not a substantial return benefit. Because the FMV of the game passes and program advertising ($16,000) does not exceed 2% of the total payment (2% of $1,000,000 is $20,000), these benefits are disregarded and the entire payment is a qualified sponsorship payment, which is not income from an unrelated trade or business. 29
EXAMPLE R liberal arts college enters a contract with S, a soft drink manufacturer that: Provides for a large payment to be made to the college's English department in exchange for R agreeing to name a writing competition after S. Provides that R will allow S to be the exclusive provider of all soft drink sales on campus. FMV of the exclusive provider component of the contract exceeds 2% of the total payment. 30
ANSWER R's use of the manufacturer's name in the writing competition constitutes acknowledgment of the sponsorship. However, the exclusive provider arrangement is a substantial return benefit. Only that portion of the payment, if any, that R can demonstrate exceeds the FMV of the exclusive provider arrangement is a qualified sponsorship payment. 31
EXAMPLE S is a noncommercial broadcast station that airs a program funded by a local music store. In exchange for the funding, S broadcasts the following message: "This program has been brought to you by the Music Shop, located at 123 Main Street. For your music needs, give them a call today at 555-1234. This station is proud to have the Music Shop as a sponsor." 32
ANSWER Because this single broadcast message contains both advertising and an acknowledgment, the entire message is advertising. The FMV of the advertising exceeds 2% of the total payment. Thus, the advertising is a substantial return benefit. Unless S establishes that the amount of the payment exceeds the FMV of the advertising, none of the payment is a qualified sponsorship payment. 33
EXAMPLE T orchestra performs a series of concerts. A program guide distributed by T at each concert. Music Shop makes a $1000 payment in support of series. Music Shop receives complimentary tickets with $85 FMV and is recognized in the program guide and on a poster in the lobby of the concert hall. The lobby poster states "The T concert is sponsored by the Music Shop, located at 123 Main Street, telephone number 555-1234." Program guide contains same and also states, "Visit the Music Shop today for the finest selection of music CDs and cassette tapes." The FMV of the advertisement in the program guide is $15. 34
ANSWER T's use of the Music Shop's name, address and telephone number in the lobby poster constitutes acknowledgment of the sponsorship. However, the combined FMV of the advertisement in the program guide and complimentary tickets is $100 ($15 + $85), which exceeds 2% of the total payment (2% of $1,000 is $20). The FMV of the advertising and complimentary tickets constitutes a substantial return benefit and only that portion of the payment that exceeds the FMV of the substantial return benefit, or $900, is a qualified sponsorship payment. 35
EXAMPLE X, a health-based charity, sponsors a year-long initiative to educate the public about a particular medical condition. Pharmaceutical co provides funding for the initiative X's website contains a hyperlink to the pharmaceutical co's website. On the pharmaceutical company's website, the statement appears, "X endorses the use of our drug, and suggests that you ask your doctor for a prescription if you have this medical condition." X reviewed the endorsement before it was posted on the pharmaceutical co's website and gave permission for the endorsement to appear. 36
ANSWER The endorsement is advertising. The FMV of the advertising exceeds 2% of the total payment received from the pharmaceutical company. Therefore, only the portion of the payment, if any, that X can demonstrate exceeds the FMV of the advertising on the pharmaceutical company's website is a qualified sponsorship payment. 37
DONATION COMPLIANCE 38
QUID PRO QUO CONTRIBUTION Defined as a payment that is partly a contribution and partly a payment for goods or services. If total payment > $75, EO must disclose to the donor the deductible amount for federal income tax purposes and provide a good faith estimate of the FMV of the goods or services furnished. EO must determine FMV. EO must furnish statement at either the solicitation or at receipt of the quid pro quo contribution. 39
DONATION ACKNOWLEDGMENTS Gifts of $250 or more donors required to obtain written acknowledgment from EO Must describe goods or services provided in exchange for the gift (or state if none) along with good faith estimate of value of such Typically sent no later than January 31 of year following gift Token exception (if applicable 100% of payment is deductible): 1. FMV of benefits received does not exceed the lessor of 2% of the payment or $102 (for 2013), or 2. The payment is at least $51, only items received bear EO s name or logo, and cost of items within limits for low-cost articles ($10.40 for 2014). 40
IN-KIND (NON-CASH) CONTRIBUTIONS Donations of tangible property or services: Verify donation is acceptable within parameters of EO s gift acceptance policy Receipt to donor should NOT include a $ value Receipt to donor should include a description of the property or services received by the EO as well as a statement as to whether or not the donor received any goods and services in return for their donation Donations > $5,000: Donor s Form 8283, Part IV completed by EO (Intend to use property for an unrelated use? Sale to obtain funds = unrelated use) EO to file Form 8282 if property sold within 3 years (save copy of signed Forms 8283) 41
DEFINING POLITICAL ACTIVITY 42
PROPOSED REGULATION 1.501(C)(4)-1 Intent: Clarify determination of political activities Broaden scope of political activity by 501(c)(4) Not intended to impose new prohibitions Characterize more activities as clearly political 43
PROPOSED REGULATION 1.501(C)(4)-1 Legislative activity (lobbying) is permissible means of attaining social welfare goals Promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office Note: 501(c)(3) prohibits any political activity 44
PROPOSED REGULATION 1.501(C)(4)-1 Current definition: Participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office Proposed: Candidate-related political activity More broad, tied to a candidate, rather than intervention in a campaign 45
CANDIDATE-RELATED POLITICAL ACTIVITY Voter Guides Voter Registration and Get-Out-The Vote Initiatives Candidate Appearances & Forums Prior to an Election Public Communications Prior to an Election Other Activities 46
CANDIDATE-RELATED POLITICAL ACTIVITY Voter Guides Reference to a candidate Reference to a political party in a general election Does not extend to candidate scorecards but these may be regulated as communications 47
CANDIDATE-RELATED POLITICAL ACTIVITY Candidate Appearances & Forums Prior to an Election: Events within 30 days of a primary election Events within 60 days of a general election One or more candidates in such election appears as part of the program 48
CANDIDATE-RELATED POLITICAL ACTIVITY Public Communications Prior to an Election: Reference to one or more clearly identified candidates in that election Reference to one or more political parties represented in a general election Published within 30 days of a primary election Published within 60 days of a general election 49
CANDIDATE-RELATED POLITICAL ACTIVITY Other Activities that would be considered Political: Public communication expressing a view on the selection, nomination, election or appointment of a candidate or candidates of a political party Communications reportable to the FEC Contributions (cash or in-kind) to political campaigns, Sec. 527 orgs, or other EO engaged in candidate-related political activities Distribution of materials prepared by or on behalf of a candidate or by a Sec. 527 org 50
PROPOSED REGULATION 1.501(C)(4)-1 Public Comment: Ambiguous, need to be simplified Need clear set of rules & bright line tests Definition of political activity should apply to all EOs Need non-political standards for voter engagement, including voter registration and get-out-the-vote 51
RESOURCES IRS Publication 1771 Charitable Contributions Substantiation and Disclosure Requirements IRS Publication 526 Charitable Contributions IRS Publication 561 Determining the Value of Donated Property IRS Publication 598 Tax on Unrelated Business Income of Exempt Organizations Internal Revenue Code (IRC) Section 513 Unrelated trade or business IRC Regulation 1.513-4 Certain sponsorship not unrelated trade or business 52
DISCLAIMER In accordance with Internal Revenue Service rules, we hereby advise you that any tax advice contained in these materials or any attachment hereto is not intended to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service. 53
MORE QUESTIONS? Contact Barb McGuan, a Principal in BerryDunn s Tax Consulting and Compliance Group, to learn more. bmcguan@berrydunn.com Phone 207.541.2319 Website berrydunn.com Blog berrydunn.com/firmfooting 54