By David Duren, CPA
Most readers are familiar with those rules: If advertising income minus direct advertising expenses yield a positive number, one can offset that amount by a loss on the non-advertising side of the periodical, but one cannot create bring the net below zero (i.e., one cannot create a tax loss in from this offset). To measure the profit or loss on the non-advertising side, one must allocate a portion of dues to the periodical (assuming it is provided free to members) under a precise formula prescribed by IRS regulations. If the organization has multiple periodicals meeting certain criteria, they may be consolidated for purposes of the above calculation. That is, total advertising income minus direct expenses for all periodicals may be offset by total non-advertising revenue minus total non-ad expenses for all periodicals. Once having elected to consolidate, one can't "un-consolidate" without prior IRS permission, except in the case of periodicals that no longer meet the criteria for consolidation.
What we haven't known is what defines a "periodical." Is a convention program a "periodical?" Is a website? In other words, how do we know that a publication is subject to the above rules? Just last year, we got our answer from an unlikely source -- the final regulations governing corporate sponsorships, published April 25, 2002.
The connection here is that "periodicals," by law, are not subject to corporate sponsorship treatment, and can't use the generous exceptions afforded to sponsorships. The exempt periodical advertising regulations, summarized above, supersede.
The final corporate sponsorship regulations define a periodical to mean "…regularly scheduled and printed material published by or on behalf of the exempt organization that is not related to and primarily distributed in connection with at specific event conducted by the exempt organization. For this purpose, printed material includes material published electronically."
So now we know. A convention or trade show program is not a periodical. Website content that is not replaced on a regularly scheduled basis is also not a periodical. Both of these may still be classified as "exploited exempt activity" and reported in a different section of the 990-T using rules that are somewhat similar to the periodical rules, but not nearly as precise.
Is that good or bad? It depends on the situation. It means that a convention program or website can't be consolidated with the periodicals. The math of the particular situation will determine if that helps or hurts one's overall tax liability. Having this new definition also means that one doesn't have to carve out a portion of dues to allocate as income to the non-advertising side of a convention program or website, but one is still required to quantify the non-advertising profit or loss from the exempt activity being "exploited" by ads. That offers an opportunity for creativity in allocating income to the activity, but it also introduces a large measure of uncertainty to the calculation.
David Duren is a Tax Principal and can be reached at email@example.com or (202) 419-5113