Non-Profits Pay Taxes On Unrelated Business Income
Just because your organization is tax exempt doesn’t mean everything you do is exempt from taxes. There are a number of activities that result in what is known as Unrelated Business Taxable Income (UBTI) which may be as much as 21%. While there are some subtle distinctions that determine what activities are taxable and which are not, program book advertising is definitely taxable.
IRS publication 598, is a good starting resource on the subject because it offers a number of scenarios as examples of related and unrelated income. Definitely talk to your accountant or lawyer about your specific activities.
Publication 598 defines unrelated business taxable income as:
Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity.
Ah! You say, but my program book is substantially related to the exempt purpose of my organization. While that may be so, in the view of governing regulations, advertising is not central to achieving that purpose.
Again from publication 598,
The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization’s exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical.
Not Everything In Your Program Book Is Advertising
Now before you start panicking too much, while advertising is unrelated business income, not everything in your program book is advertising. You can place a sponsor’s logo within your program book along with a statement supporting the activities of your organization like “Acme Widgets Supports The Arts. We Hope You Enjoy Your Experience.”
Among the things not permitted are calls to action or use of superlative adjectives in connection with the sponsor’s product. They can encourage people to see the amazing art at your museum, but can’t encourage people to see the amazing deals at their store.
When you are going out to solicit businesses to participate in your program book or other publication, it is best not to even use the phrase “program advertising” because advertising income is taxable and that isn’t what you are offering. As it is, the money will likely be coming from a company’s marketing and advertising budget because that is the context in which they are viewing the program book placement. You may need to ask them to revise the content in order to conform with the definition of related business activity. The best term to use might be program sponsorship.
In another ArtsHacker post I made on the rules governing valuing and acknowledging donations, I cited a webinar conducted by John Taylor of John H. Taylor Consulting.
In that webinar, he touched upon what types of recognition sponsors can and can not receive. These rules cover all activities related to sponsorship, not just program ads. You will note that it is permitted to have the sponsor’s product displayed at sponsored events and hand out samples. So you can have a huge display of Godiva Chocolates in your lobby with the name, address, and web address of the local store and hand out boxes left and right.
You just can’t have a sign that includes the words “Enjoy” or “Decadent.” Nor should there been any invitation to visit the store. (The local Decadent Desserts franchise wouldn’t be restricted since the word is part of the brand name.)
Even with these guidelines, the distinctions of what is and isn’t permissible can be pretty difficult to parse. Which is why it is best to get some professional advice. I was recently advised that while a phrase like, “Partnering To Serve The Tri-State Region,” was acceptable because it is a statement of fact about a geographical service area, “Partnering To Serve You,” wasn’t because it constituted an inducement to an individual to use a service.
A company which decides they want to say, “We bring good things to Your Town,” would have to cut the qualitative language. Presumably General Electric would be permitted to say, “We Bring Good Things To Life,” because it was a slogan that was an established part of their identity.
In case you are wondering, these rules apparently apply equally to other non-profits so you can’t have content encouraging people to donate to the local United Way or Community Foundation even if some of that money may come back to you in the next granting cycle.
What About Concessions and Merchandise?
Having learned all this, you may start to wonder if your intermission sales of concessions is considered unrelated business income. Publication 589 has an example that says it is not:
Museum eating facilities. An exempt art museum operates a dining room, a cafeteria, and a snack bar for use by the museum staff, employees, and visitors. Eating facilities in the museum help to attract visitors and allow them to spend more time viewing the museum’s exhibits without having to seek outside restaurants at mealtime. The eating facilities also allow the museum staff and employees to remain in the museum throughout the day. Thus, the museum’s operation of the eating facilities contributes importantly to the accomplishment of its exempt purposes and isn’t unrelated trade or business.
Note this example mentions a benefit to employees and visitors. If you are selling coffee every morning to passersby because you notice there is a lot of foot traffic going past your lobby from a nearby hospital and lawyers’ offices, that does not contribute to the exempt purpose of your organization even if it might be diminishing an intimidation factor related to the arts.
Gift shops/souvenirs and similar product sales activities are largely considered to be related to the exempt purpose, but the content has to be related to the general purpose of the organization. Publication 589 has an example of a museum selling books containing art that isn’t part of their collection because the purpose of the museum is educating the public about art. However, sale of souvenirs related to the city in which the museum is located is considered unrelated. So the Metropolitan Museum of Art can sell postcards of the Mona Lisa, but not the I Heart NY logo.