By Edward Yoder, CPA, MSA

Two previous articles in this series went into detail about how nonprofits can incur taxable income from advertising or sponsorship sales, and how different the taxable impact can be depending on the relationship of certain costs to certain types of income. There is another important consideration of UBTI and advertising: allocable membership receipts. Especially for exempt organizations like trade associations or professional organizations, proper consideration to allocating membership receipts can affect the overall taxable impact of periodicals.

What are Allocable Membership Receipts?

Nonprofits can charge subscription fees or member dues for exclusive access to content. And, like advertising or sponsorship income, these charges can generate taxable income. Allocable membership receipts of an exempt organization periodical are determined in accordance with the following rules.

Subscription price charged to nonmembers
If 20 percent or more of the total circulation of a periodical consists of sales to nonmembers, then the subscription price charged to nonmembers determines the price of the periodical for purposes of allocating membership receipts.

If 20 percent or more of the members of an exempt organization pay lower membership dues because they do not receive the periodical, the reduction in dues for these members determines the price of the periodical. This price is used to allocate membership receipts specifically to the periodical.

Pro rata allocation of membership receipts

Since it may generally be assumed that membership receipts and gross advertising income are equally available for all the exempt activities, the share of membership receipts allocated to the periodical are an amount equal to the organization’s membership receipts multiplied by a fraction, where the numerator is the total periodical costs and the denominator is such costs plus the cost of other exempt activities of the organization.

Allocating Membership Receipts to Nonprofit Periodicals

Recall that circulation income is the total amount derived from selling or distributing a periodical’s content. Circulation income also includes the portion of membership fees attributed to the periodical.

Assume that an exempt organization has total periodical costs of $30,000 and other exempt costs of $70,000. Further assume that the membership receipts of the organization are $60,000. Under these circumstances, $18,000 ($60,000 times $30,000/$100,000) is allocated to the periodical’s circulation income.

An exempt scientific organization has 10,000 members who pay annual dues of $15 per year. One of the scientific organization’s activities is the publication of a monthly periodical, which is distributed to all members. The organization also distributes 5,000 additional copies of its periodical to non-member subscribers at a cost of $10 per year.

Since the nonmember circulation of the periodical represents one-third of its total circulation, the subscription price charged to nonmembers will be used to determine the portion of the organization’s membership receipts allocable to the periodical. Thus, the organization’s allocable membership receipts will be $100,000 ($10 times 10,000 members), and total circulation income for the periodical will be $150,000 ($100,000 from members plus $50,000 from sales to nonmembers).

An exempt trade association has 800 members who pay annual dues of $50 per year. The trade association publishes a monthly journal, the editorial content and advertising of which are directed to the business interest of its own members. The journal is distributed to all the trade association’s members and no receipts are derived from nonmembers.

The trade association has total receipts of $100,000, of which $40,000 ($50 times 800) are membership receipts and $60,000 are gross advertising income. Total costs for the journal and other exempt activities are $100,000. The trade association has total periodical costs of $76,000, of which $41,000 are direct advertising costs and $35,000 are readership costs.

Since there are no nonmember subscription receipts, the allocation of membership receipts is made based upon the pro rata allocation method. To identify circulation income, take $40,000 times the fraction of the periodical costs ($76,000) divided by the total costs of the journal and the other exempt activities ($100,000). Circulation income equals $30,400 ($76,000 / $100,000 times $40,000) of membership receipts.

Pro-rata Allocation of Membership Receipts

Professional associations and other professional or trade organizations run into this issue frequently, and leaders may not understand how to accurately account for membership receipts and periodical sales. Periodicals can be powerful tools for reaching an exempt organization’s audience and advancing their mission. It’s more than providing meaningful content – the strategy also lies in tax implications.

For questions about how to allocate membership receipts to the circulation income of nonprofit periodicals, reach out to your PBMares Tax Advisor today to learn more, or contact Tax Partner Ed Yoder, CPA, MSA.