The internet is an important method for organizations to communicate with the world. Most Section 501(c)(3) exempt organizations have websites that they use for a variety of purposes, including describing programs/missions, soliciting contributions, advertising, notification of special events, and linking supporting organizations and companies.
While the internet is a great marketing tool, its use by tax-exempt organizations is drawing the attention of the IRS and generating an ever-growing list of tax inquiries. Of major concern to the IRS is whether any of these activities result in unrelated business income tax (UBIT), which would require the payment of tax on that income.
The fact that the internet is used to accomplish a particular task does not change the way in which current tax laws apply to that task. The regulations that apply to offline transactions should be followed until there is specific guidance for similar online transactions. The IRS is currently in the process of formulating appropriate guidelines for exempt organizations.
Below are a few topics focusing on the federal tax aspects of internet usage:
Link/banner exchanges
Exchanging links or “banners” (a graphic advertisement, usually a moving image measured in pixels) with other online organizations may result in taxable advertising income. The IRS will determine whether the exchange is an exchange of advertising or simply an attempt to provide additional information about the organization's exempt purposes and activities based on the facts and circumstances. An exempt organization should continuously monitor the content of linked websites, as a content change could result in an unexpected advertising income issue.
Advertising
In a private letter ruling, the IRS has stated that advertising appearing on an exempt organization's website generally, and not as part of an online version of its periodicals, would not be treated as periodical advertising. Whether website advertising is periodical advertising is important because UBIT on advertising in a periodical is calculated under a specific rule.
The ruling observed that even though an organization may choose to give “free” website advertising to its periodical advertisers, such advertising has separate value. Unfortunately, the ruling does not offer specific guidelines to determine whether online advertising is part of an online version of a print periodical. Organizations should analyze their facts and circumstances each year.
Characterization of corporate support
Payments received by nonprofits from corporations may be nontaxable sponsorship revenue or taxable advertising income. The key is whether the content of the recipient's acknowledgment of its corporate benefactor stays within acceptable guidelines. An exempt organization is deemed to have simply acknowledged a sponsor if it merely includes the sponsor's internet address on its website with a hyperlink to the sponsor's website. However, if there is a hyperlink to a sponsor's website where there is an endorsement of the sponsor's product by the exempt organization, the endorsement is considered advertising and potential UBIT.
Prohibition on political campaign participation
The IRS is currently reviewing the websites of exempt organizations for signs of political activity. For example, an exempt organization may be guilty of political activities if its website is linked to a political organization. Therefore, charities should proceed cautiously until the IRS formulates guidelines on permissible internet activities.
Contact us at 215.441.4600 if you have questions or would like to discuss how this topic may impact your business.