Potential Issues With Funding Through Adsense

[Nikos]

I founded and now work for a nonprofit that has at its core multiple forums where people congregate and discuss. We have been suffering from some funding issues and one of the options was to place local sponsorships on the forums, having each sponsor pay a portion of the chapter's overall costs and in return, receiving acknowledgement on the forum for their contribution.

In discussing this as an option, someone suggested just using Google AdSense to fill those sponsorship spots, which could potentially generate more income than what the local sponsors would.

My concern is that with the local sponsorship spots, as long as we followed the "qualified sponsorship" guidelines by the IRS, we could consider those tax-exempt payments. I understand this is not true with AdSense and those payments will be subject to UBIT.

My concern is that we are expecting a high level of income from Google Adsense(whether this expectation is justified or not, I cannot be sure -- I am looking into that as well!), and as all of that income will be UBIT, we will run into problems.

The ramifications of having a high UBIT were brought up when the sponsorship plan was presented, but it was determined not to be an issue, because the sponsorship payments would be qualified. As using Adsense will definitely make this payments subject to UBIT, what are the potential tax ramifications? Also, will this affect our 501c(3) status if a majority of our income falls into the UBIT category?

Thank you for your consideration of my question.

ANSWER: IRS Publication 598 "Tax on Unrelated Business Income of Exempt

Organizations" at

www.irs.gov/pub/irs-pdf/p598.pdf

explains that,  if products or services are not directly related to

the charitable, educational, religious or other purpose or function

constituting the basis for its exemption(other than for production

of income), then the activities are generally taxable.

The IRS has declared, "Nonprofit organizations that are granted

Federal tax exemption based on their mission-related purposes

are allowed by the IRS, within certain limits, to generate income

from unrelated business activities."

www.irs.gov/pub/irs-soi/97eounrl.pdf on pdf page 1. But, the

organization could, if it has more unrelated activities than

the IRS's vague "certain limit", be jeopardizing its exemption

depending upon the facts and circumstances. Two of the main factors

is the gross income of the activity in relation to the gross income

of the organization's total income and staff time spent on the

activity. Court cases reveal that 5% is probably safe, whereas 20%

or more can jeopardize exempt status. Harvey Mechanic, Attorney at Law - [email protected]

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.

---------- FOLLOW-UP ----------

So, if I am reading this right, you are saying that we should be careful to limit our UBI to 5% or so of our total income.

Meaning that if, say, we were to generate 60% of our total budget through this Adsense income, we could be in some jeopardy of losing our status?

Thank you for such a great and quick reply!

[Morgannwg]

You are welcome.

I am not going to give you my opinion as to the 5% number, but, as to the 60%, yes, that would jeopardize your exempt status.  If you want me to review your situation if you kept the Adsense income below 20% I would need to review your total operations.  I would be willing to work on that matter, but I would need to spend a substantial amount of time and that would be beyond the scope of my offer of free services.  If you want to inquire about hiring me for such work, please contact me directly to the email address below.  

Harvey Mechanic, Attorney at Law - [email protected]

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.