Anyone can access your organization’s website – even the IRS. Not only can anyone easily find it through an Internet search, it is now prominently displayed on the first page of your Form 990. As the IRS begins to scrutinize tax-exempt organizations more closely, it is likely examine your organization’s Web advertising and merchandising.
Many not-for-profit organizations have advertisements on their websites. Just like print or periodical advertising is unrelated business income (UBI), Internet advertising is also taxable income, even when your organization eventually uses the revenues to support its exempt activities. Generally, advertising messages contain qualitative or comparative language, endorsements or other inducements to purchase the sponsor’s products or services.
If agreements are properly structured as qualified sponsorships, payments received in connection with sponsorship contracts would not be subject to UBI, even if the sponsorship is on the organization’s website. In general, sponsorships merely acknowledge the sponsor by displaying its name, logo, or product lines.
But other Web activities may have UBI implications, even if it seems like sponsorship income.
For example, placing links or banners could result in taxable advertising income, depending upon the content of the linked website. So if you place a hyperlink to a sponsor’s website on your organization’s website, the arrangement might be considered a qualified sponsorship. However, if you include an endorsement with the hyperlink to the sponsor’s website, it would be considered advertising. To help avoid UBI implications, review the content of any linked websites and consider including language in sponsorship contracts that address the linked content.
In the future, the IRS will probably look closer at a not-for-profit organization’s website to ascertain whether organizations have UBI and to get a better understanding of its other activities. Routinely monitor your organization’s website for potential UBI implications and analyze their facts and circumstances each year.
If you have questions about UBI implications of your organization’s internet activities, please talk to your tax advisor.