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Nonprofit Tax UBIT Update: Educational Periodicals

Situation: Vienna University (VU) is an educational organization. VU publishes an educational magazine, the content of which is exclusively on VU’s website. In addition to grants and contributions, VU is supported in part by advertising revenues. VU employs writers, researchers, a creative director, and an editorial director for its publications, and also incurs expenses for website maintenance and overall administration. For purposes of the unrelated business income cost allocation rules of Section 1.512(a)-1(f) of the Income Tax Regulations, VU’s website publication is a “periodical.”  Accordingly, VU’s expenses, depreciation, and similar items of deduction attributable to the production and distribution of the website publication, including the salaries of the publication staff,  qualify as items of deductions directly connected with the unrelated advertising activity and may be used as deductions against the unrelated business income attributable to the sale of advertising in the website periodical.

Website Publications

Section 1.512(a)-1(f) of the Income Tax Regulations provides that amounts realized from the sale of advertising in a periodical constitute gross income from an unrelated trade or business activity involving the exploitation of an exempt activity, namely the circulation and readership of the periodical developed through the production and distribution of the readership content of the periodical.  Subject to the limitations of paragraph (d)(2) of the regulation, where the circulation and readership of an exempt organization periodical are utilized in connection with the sale of advertising in the periodical, expenses, depreciation, and similar items of deductions attributable to the production and distribution of the editorial or readership content of the periodical qualify as items of deductions directly connected with the unrelated advertising activity.

Section 1.513-4 of the Income Tax Regulations provides rules for qualified sponsorship payments, and excepts from such rules the income from the sale of advertising or acknowledgements in exempt organization periodicals.  A “periodical” is defined as regularly scheduled and “printed material” published by or on behalf of an exempt organization that is not related to and primarily distributed in connection with a specific event conducted by the organization.  For this purpose, printed material includes material that is published electronically.

 

Also, check out the 2014 Advisory Committee on Tax Exempt/Governmental Entities (ACT) Report – released on June 11 – at http://www.irs.gov/pub/irs-tege/tege_act_rpt13.pdf

 

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