Nonprofit Advertising Income: A Basic Guide
By Ariana N. Warren, CPA, Senior Manager, Tax & Business Services
Nonprofit organizations are not limited to raising funds solely through charitable contributions. Like commercial entities, nonprofits can also generate revenue by selling advertisements. These ads can appear on websites, in brochures, or in periodicals and they generate taxable income. Often the nonprofit is aware of the tax liability, but accurately reporting the activity, properly bifurcating expense types, and membership dues income proves daunting. Let’s walk through some of the basic steps to get to the correct calculation.
First thing’s first: A key component of calculating taxable expenses is an accurate count of advertisement pages and total number of pages in the periodical. If you are advertising on a website rather than in print, select a reasonable methodology to make comparable measurements and be consistent. Using the ad pages as your numerator, divide by total pages to arrive at a percentage. This is your advertising percentage.
Next, consider expense types: direct, periodical, and editorial. Direct costs are associated solely with direct ad placement. Typically these are agency fees, commissions, and similar costs. Editorial costs are those incurred solely for editorial content. Then there are periodical costs, which are a blend of the first two categories. Items such as printing, postage, salaries, design, and overhead expenses are generally included in these expenses.
The advertising percentage calculated earlier can now be applied against your total editorial costs. That allows you to divide these costs between direct and indirect expenses. The sum of the non-advertising periodical costs and editorial costs becomes your readership cost.
Properly calculating circulation income is a step often omitted when utilizing readership costs. If members or the general public pay a fee to receive the publication, then circulation income must be calculated. Circulation income must also be imputed if nonprofit members receive access to the periodical as part of their membership dues assessments. Divide your total publication costs by total expenses (less non-exempt costs like professional fundraising, lobbying, and other 990-T costs), then multiply by membership dues to derive circulation income.
Once the advertising income, expenses, circulation income, and readership costs have been calculated, all taxpayers should document this information for future use and in preparation of the possibility of the Internal Revenue Service selecting the nonprofit for examination. Grinding through this tedious calculation can unravel even the most prudent of record keepers.
If you need support accurately accounting for taxable income from advertising, please reach out to the Marcum nonprofit tax group.