Potential Tax Traps of Sponsorship Revenue

Not-for-profit REALTOR® associations have specific rules to follow to keep sponsor dollars tax-exempt.

by Charlie Lee, associate counsel, National Association of REALTORS®.

Sponsorships provide a significant source of funds that help you host conferences, events, education, and other activities that boost the value of membership. As you work to line up sponsors for next year, savvy companies will ask for more value, more exposure, and more return on investment from their sponsorships.

Your sponsors want expanded ways to engage with members, and although it is important to facilitate opportunities for sponsors to connect, it is equally important to understand the rules of corporate sponsorship if your REALTOR® association is a tax-exempt organization, 501(c)(6). Pack your sponsorship package with too many perks, access, or endorsements, and you could receive a larger-than-expected tax bill if the IRS says sponsor dollars are actually advertising income.

Here’s how to avoid this tax liability

First, as you may already know, the Internal Revenue Code permits associations to be tax-exempt and avoid federal income tax on most of their income. Notwithstanding that exempt status, the IRS does impose tax on your income-producing activities when they are of a kind ordinarily carried out by for-profit companies and are not closely related to the exempt purposes of your association. Such activities could include activities such as renting out the association’s conference room as a movie theater. The tax on such income is called “unrelated business income tax,” or “UBIT.”

For example, not-for-profit REALTOR® associations typically do pay income tax on the revenue generated from their advertisement sales in their magazines and newsletters.

Qualified Sponsorship Payments

Now back to sponsorships. There’s an exemption to the UBIT rule for qualified sponsorship payments. This means a sponsorship payment will not be considered taxable income if the corporate sponsor is only acknowledged or given recognition—so it’s unlike buying an advertisement in your association magazine.

Not-for-profit associations cannot give sponsors other benefits in return for sponsorship if they want to keep the sponsorship income tax-exempt.

The rules for qualified sponsorship payments say an acknowledgment cannot recommend, endorse, or promote a ­sponsor’s business, product, or service. Yet an association’s acknowledgment of a corporate sponsor can include:

  • Printed thanks in an onsite conference program;
  • Verbal thanks from staff or leaders during an association meeting or event;
  • Recognition of the corporate sponsor on your website that includes the sponsor’s name, logo, and slogans that do not contain qualitative or comparative descriptions of the sponsor’s products, services, or company;
  • Value-neutral descriptions, including displays or visual depictions, of the corporate sponsor’s product line or services; and
  • Exclusive sponsorship arrangements (as opposed to exclusive provider arrangements).
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Not-for-profit associations cannot give sponsors other benefits in return for sponsorship if they want to keep the sponsorship income tax-exempt.

Merely displaying or distributing (whether for free or for sale) a sponsor’s product at an association’s activity is not considered an inducement to purchase, sell, or use the corporate sponsor’s product. So the expo space at your annual conference where sponsors display and sell their products is permitted under the rule for qualified sponsorship payments.

In contrast to the permitted acknowledgments above, your not-for-profit association cannot broadcast or otherwise transmit, publish, display, or distribute:

  • Messages containing comparative language about the sponsor’s product or service (e.g., “ABC product is better than XYZ product”).
  • Messages containing qualitative language about the corporate sponsor’s product or service (e.g., “XYZ product is the best on the market!”).
  • Indications of savings or value associated with the corporate sponsor’s product or service (e.g. “ABC product offers the best value”).
  • Endorsements or inducements to purchase, sell, or use the corporate sponsor’s company, service, facility, or product (e.g., “All REALTORS® should buy XYZ product”).

If an association’s message contains both endorsements and an acknowledgment, the entire message will be deemed subject to UBIT.

As you sell your sponsorship packages, always retain control over any sponsored activity including content or materials. Review and approve communication your sponsors make to others that refers to the sponsorship or the association. Make sure your sponsors use the association’s marks or logos appropriately, and with any sponsored activity or event, the association’s identity and presence should dominate.

Also, don’t bundle sponsorship and advertising in one package; have separate agreements and payments for each. This will make it easier to track taxable and nontaxable revenue and will make any IRS audit a lot smoother. The aim with each corporate sponsorship should be to provide value to the members along with the visibility it provides to the sponsor.

If you have any questions about corporate sponsorships or UBIT, please feel free to contact Charlie Y. Lee at clee@realtors.org.

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