Situation
Troas Bible College (TBC) publishes an educational magazine, Rising Tides, the content of which is exclusively on TBC’s website. TBC is a U.S. private college. In addition to grants and contributions, Rising Tides is supported in part by advertising revenues. TBC employs writers, researchers, a creative director and an editorial director for its publication 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, Rising Tides (TBC’s website publication) is a “periodical.” Accordingly, TBC’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.
Rules
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.
TBC would report the advertising income – and related expenses – on Form 990-T, Schedule J, Part I.
For more info on this and other UBIT issues, check out the 2014 Advisory Committee on Tax Exempt and Government Entities (Exempt Organizations) Report at:
https://www.irs.gov/pub/irs-tege/tege_act_rpt13.pdf
Bottom Line
Navigating the rules around website publications is complicated!! Always consult with a tax professional if you are considering an activity of this kind. He or she can walk you through the regulations and help you determine the course of action that is most beneficial to your organization — and help ensure you’re complying with the spirit of the law.
Specific questions? Email Dave Moja
The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.