- Virtual events can generate adverse tax consequences from the IRS and expose your nonprofit organization to unrelated business income tax (UBIT).
- To qualify for the safe harbor, your organization must meet specific requirements.
- The IRS places importance on the networking and educational components that are usually connected with an in-person trade show.
- Without further IRS guidance, rely on the current IRC statute, regulations, and Revenue Ruling 2004-112, as the basis for tax planning for virtual events.
Nonprofit organizations that are exempt from federal taxation under Internal Revenue Code (IRC) Sections 501(c )(3), (4), (5) and (6) have been adversely affected by the COVID-19 pandemic. In response to the “new normal,” some organizations have developed alternative strategies to accomplish their mission if in-person programming is not permitted. For example, virtual trade shows and similar online events are on the rise.
Need to mitigate federal and state UBIT exposure?
However, the manner in which your nonprofit organization plans and conducts these virtual events is important. These events can create adverse tax consequences from the Internal Revenue Service (IRS) and expose you to unrelated business income tax (UBIT).
Generally, a nonprofit organization that has a federal tax exemption could be subject to federal and possibly state corporate income tax if it has net taxable income from a business activity that is “regularly carried on” and “unrelated” to the organization’s tax-exempt mission. If this situation exists for your organization, you could be subject to federal UBIT.
Income received from a qualified convention and trade show activity is generally deemed to be related to the organization’s tax-exempt purpose and would not create UBIT exposure. Furthermore, Treasury Regulations 1.513-3(b) and 1.513-3(c)(2) create a safe harbor from UBIT for organizations that conduct qualified convention and trade shows on a regular basis. To qualify for the safe harbor, your organization’s trade show must:
- Be regularly conducted and substantial to the organization’s exempt purposes.
- Stimulate interest and demand for the products of the particular industry or industry segments.
- Educate the public in attendance on new developments, products, and services related to the organization’s tax-exempt mission.
In 2004, the IRS published Revenue Ruling 2004-112, which provided some guidance on how the IRS views virtual trade shows. In that ruling, the IRS described two different virtual trade show situations:
Situation A: The trade association hosts three days of virtual trade show activities book-ending a ten-day in-person trade show.
Situation B: The trade association hosts a two-week trade show entirely online.
Note that in both of the above situations, the following facts were constant:
- Online trade show activities were identical.
- The website allowed members and interested persons to access information and visual displays.
- There were links to the trade association’s members’ websites.
- There were also links to suppliers of goods and services, as well as order forms and online purchase functions from trade association members and suppliers at the trade show.
The IRS concluded that the income received from the virtual trade show in Situation A, which accompanied the traditional in-person trade show with networking, education, and sales activities, qualified for the “related” safe harbor under IRC Section 513(d)(3).
However, the income from the virtual trade show in Situation B, which was held entirely online, did not qualify for the IRC Section 513(d)(3) safe harbor.
The main takeaway from this revenue ruling is that the IRS appears to place great importance on the networking and educational components that are usually connected with an in-person trade show. Its conclusion that Situation B did not qualify for the IRC Section 513(d)(3) safe harbor means that Situation B could possibly expose the trade association to UBIT if the event lacked the required trade, networking, and educational components.
Tips to plan your virtual event
A lot of technology advances in trade show and related programming have transpired since the 2004 revenue ruling. The advent of COVID-19 and its in-person restrictions have forced many nonprofit organizations, including trade associations, to recreate their activities in virtual form.
Without new guidance, it’s unclear whether the IRS will change its stance on income generated from an interactive virtual event. However, organizations can use the current IRS guidance on this topic as a guide to develop future virtual trade show events to meet the IRC Section 513(d)(3) safe harbor regulations and mitigate UBIT exposure.
The IRS looks at several factors to determine whether a virtual event is a “qualified convention or trade show activity” eligible for the IRC Section 513(d)(3) safe harbor. Virtual shows should:
- Promote and stimulate interest in, and demand for, the products and services of an industry or profession
- Educate attendees on new developments, products, or services related to the exempt activities of the organization
- Be designed to achieve the above purpose through the character of the exhibits and products or services on display
- Be limited in length of time, so that it can be interpreted to be a specific event on a similar basis as previous in-person events conducted by the organization
- Prominently highlight one or more of the following factors: networking, sales, education interactive exhibits, and online education
- Have the look and feel of in-person events previously held by the organization
- Use the income generated to defray the event’s operating costs. Any net income generated by the event should be used to further the organization’s tax-exempt mission.
Without further IRS guidance, Section 501(c)(3), (4), (5) and (6) nonprofit organizations should rely on Revenue Ruling 2004-112 and current IRC statutes and regulations for virtual event tax planning purposes. Implement careful, proactive virtual event planning and execution that takes current tax law into consideration to help mitigate federal and possible state UBIT exposure to your organization.
How we can help
COVID-19 has been tough on nonprofits. Even if your organization has adapted, whether through holding virtual events or taking other measures, it’s critical to anticipate any potential tax ramifications. If you have questions about tax planning for virtual trade shows, online events, or any other creative steps you’re taking during this time, reach out to our team.Contact Us