Can We Sell Ads in a Program Book?

Summary:

Sure. But there are some factors that should be considered carefully before starting down this road.

Answer:

When putting together a program booklet for a special event, many nonprofits solicit ads from local businesses, suppliers, and supporters. It's important to plan carefully, as the following discussion suggests, to be sure the income is classified properly and doesn't lead to more trouble than it's worth.

The general point is that advertising the products or services of nonprofit organizations cannot be an "exempt purpose" (and, further, there are some sorts of advertisements that cannot be mailed at nonprofit rates -- see http://www.nonprofits.org/npofaq/03/30.html). That means that the "ads" cannot really be advertisements unless the nonprofit is willing to take the trouble to account for this income separately and pay unrelated business income taxes on it.

A reader wrote in CHARITYTALK (a service of http://www.charitychannel.com):
Here is the deal as I understand it. Of course the ad is not a charitable
donation, but even better, the ad is a business expense and can be charged
to
advertising, which is a deductible business expense. This opens up a whole
new set of potential advertisers and a whole new approach to businesses.
Much easier to get a business expense deduction than a charitable
contribution.

Ken Ristine of the Ben B. Cheney Charitable Foundation in Tacoma, WA, responded:
The issue of deductibility is for the donor to determine. However, if you decide to take this to the next step and sell ads
(as opposed to congratulatory "tombstones" in a book or a program) your
organization becomes liable for UBI (Unrelated Business Income) taxes. UBI
tax is not all that much, and having to pay some UBI tax should not discourage
you if it is worthwhile.

Interestingly, it appears that you can trigger UBI even if the "ads" are not
really ads selling something. One example I heard related by a very
knowledgeable CPA was that if an organization puts the remark, "Please
patronize our sponsors" in a program, then the income from the sponsors'
congratulatory ads (that are not really ads) becomes technically liable for
UBI tax.

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Gayle L. Gifford, ACFRE,
of
Cause & Effect, Inc.
(CEffect@aol.com) added the next day:
I think the difficulty in answering this is that the IRS regulations are not
very clear and are not in one place.

Here's my interpretation (but get your own from your own CPA or try
CharityLaw):

Overall, you need to determine if the donor received a quid pro quo for the
gift under the current standards and safe harbor provisions. If they did
receive a quid pro quo, then that portion of the donation is not tax
deductible as a charitable contribution.

However, in this case, much of that depends on whether or not the donor
received commercial value for the payment. To determine that, you'll have to
look at the regulations on "qualified sponsorship payments" which distinguish
whether what your donor receives is advertising (which is not tax deductible
as a charitable contribution) or "use or acknowledgment" which might be tax
deductible as a charitable contribution. Unfortunately, these definitions are
in the section about UBIT and those the confusion. Requires a lot of
interpretation and no two interpretations will be alike.

From the IRS:
"A 'qualified sponsorship' is defined as a payment made by a person engaged
in a trade or business with respect to which the person will receive no
substantial return benefit other than the use or acknowledgement of the name
or logo (or product lines) of the person's trade or business in connection
with the organization's activities. ... Such acknowledgement does not include
advertising of such person's products or services, i.e. qualitative or
comparative language, price information or othr indications of savings or
value, or an endorsement or other indication of savings or products or
services. ... A qualified sponsorship payment does not include any payment
whose amount is contingent, by contract or otherwise, upon the level of
attendance at an event, broadcast ratings or other factors indicating the
degree of public exposure to an activity. ... This does not apply to
acknowledgment of the payors trade or business name or logo (or product
lines) in an exempt organizations periodicals. Such payments are outside the
qualified sponsorshop payment provisions safe-harbor exclusion and therefore
will be governed by the rules that determine whether the payment is subject
to UBIT. Thus, for example, payments that entitle the payor to the depiction
of its name or logo in an exempt organization's periodical may or may not be
subject to UBIT, depending on the application of the rules regarding
periodical advertising and nontaxable donor recognition."

Get that?

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Posted 5/2/02 -- PB