How can marketing and other relationships help support Water Funds?
Water funds may seek support from for-profit organizations, as well as from government or other non-profits. A water fund with a strong reputation and trademark will have multiple opportunities to use those assets for the benefit of for-profit organizations, in exchange for financial or other support. For example, a water fund might publicly acknowledge a donation from a for-profit organization on a physical sign or in its regular reporting to members. Or, a water fund might invite another non-profit organization to participate in a groundbreaking or other event, in exchange for the other non-profit organization acknowledging the water fund when it solicits its own members. A water fund may receive funding from a government agency in order to fulfill the purpose of the agency or in order to mitigate the adverse impact of others. Finally, a water fund may have an opportunity to enter into agreements to advance its own mission directly, by changing the behavior of other organizations or reducing their environmental impact.
How can a Water Fund best seek support through relationships?
In order to have opportunities for support in exchange for marketing and public relations activities, a water fund must have a strong, positive reputation and brand. The water fund might want to select or invent a distinctive name or logo that it can register as a trademark and exclude others from using. The water fund should ensure that its representatives speak and act in ways that are consistent with its mission and strengthen public opinion in its favor. A water fund can leverage public trust and confidence for its own benefit, including financial support. In doing so, a water fund should take the utmost care not to tarnish its reputation by appearing to prioritize its immediate financial gain ahead of its broader, longer-term objectives.
How Do U.S. Tax Laws Limit the Financial Support that Non-Profit Water Funds May Receive from For-Profit Organizations?
A water fund that is a non-profit organization is subject to certain limitations on its activities if it desires to preserve its tax-exempt status under U.S. tax law while pursuing financial support from for-profit organizations. In particular, a non-profit organization may want to avoid activities that would cause it to pay “Unrelated Business Income Tax” (UBIT). Non-profit corporations pay UBIT on the net income from activities not related to their exempt purposes at the same rates that apply to the net income of for-profit corporations. And, a non-profit organization can lose its non-profit status if it pays too much UBIT. Although the IRS has never quantified how much UBIT will put non-profit status at risk, it is a rule of thumb that revenue from activities subject to UBIT should be less than 25 percent of total revenue from all sources.
A nonprofit corporation is subject to UBIT if three factors are present: (1) the source of the revenue is a “business” activity that a for-profit corporation might also undertake; (2) the activity is carried on “regularly,” that is, more than once a year; and (3) the activity does not relate substantially to the non-profit’s tax-exempt purposes.
How May a Non-Profit Water Fund Receive Financial Support from For-Profit Organizations Under U.S. Tax Laws?
There is an important exception to “Unrelated Business Income Tax” (UBIT). UBIT does not apply to income derived from “passive” activities of a non-profit, such as royalties from licensing use of the non-profit’s name or trademark. So, a water fund could engage in an “affinity program” under which it licenses its name or trademark to a for-profit organization for use in advertising the for-profit organization’s goods and services. Common examples of affinity programs include using a non-profit’s name on credit cards or insurance products. In order for the income to be passive, the non-profit must not assist in marketing or other activities relating to the affinity program.
What if the water fund is able and willing to provide marketing and other services in exchange for financial support? As noted above, a non-profit can generate some amount of revenue (< 25% of total revenue) from unrelated business activities and retain its non-profit status, as long as it pays income tax on that revenue. Or, the non-profit could create a controlled for-profit subsidiary to engage in activities subject to UBIT. The subsidiary would pay tax on its net income like any other business, but it would not put at risk the non-profit status of the parent. There are, of course, substantial ongoing administrative, accounting, and legal expenses associated with having a subsidiary.
Another possibility is that the water fund and the for-profit could form a “commercial co-venture” to generate revenue from the business activity. The share of the co-venture’s revenue received by the non-profit will be tax-exempt as long as the non-profit exercises majority control over the co-venture, for example, by having a majority vote on the co-venture’s governing board, receiving a majority of the co-venture’s financial return, or controlling aspects of the co-venture relating to tax-exempt purposes. Many states regulate co-ventures, and it might be necessary to have a written contract and reporting capabilities to comply with state regulations.
If a controlled subsidiary or a commercial co-venture appear too complicated, a water fund should consider sponsorships or cause marketing instead. Sponsorships are payments by a for-profit organization to a non-profit organization. Whereas an affinity program typically involves ongoing payments to the non-profit based on the affinity program’s success, a sponsorship typically involves a lump-sum payment to the non-profit to support an event or program. There are, again, restrictions on what the non-profit can do in exchange for the sponsorship. The non-profit may publicly acknowledge and thank the sponsor. The non-profit may display the sponsor’s logo, brand, and even the sponsor’s goods or services when acknowledging the sponsor. But, the non-profit may not advertise or promote the sponsor’s goods or services, or encourage customers to buy them. It is admittedly a fine line. If the combined fair market value of all goods, services, and other benefits provided to the sponsor exceed 2% of the sponsorship payment to the non-profit, the non-profit is at risk of taxation.
Cause marketing involves payments by a for-profit organization to a non-profit organization that are typically tied to sales of the for-profit’s goods and services. For example, a plant nursery could make a donation to a water fund every time a customer purchases a certain type of plant for the watershed. The water fund will want to be thoughtful about which plants to endorse and how its name and trademark are used. It would be prudent to enter into a written agreement with the plant nursery addressing these concerns, the amount of the donations, the duration of the arrangement, and similar matters.
For-profit corporations may be able to deduct sponsorship and cause-marketing payments to non-profits if the non-profits qualify as charitable organizations. In addition, some for-profit corporations sponsor private foundations, the purpose of which is to make donations to non-profit charities. A customer who purchases goods or services in response to a cause marketing campaign is not entitled to a deduction, however.
How Can a Water Fund Obtain Financial Support From Non-Profit Organizations or Governments?
Water funds can also pursue financial support from other non-profit organizations or from government. A conservation organization might give a water fund financial support in exchange for water for protected land. Such payments are unlikely to be subject to UBIT because the water fund’s allocation of water arguably is not a business activity that a for-profit corporation would undertake, and the activity relates substantially to the water fund’s exempt purposes.
Water funds often receive financial support from government agencies. In some cases, the water fund is formed to select and monitor projects that advance government objectives, such as protection of a watershed or improvement of the public water supply. In other cases, a government agency might support a water fund in order to fulfill the requirements of a law or directive regarding pollution abatement or mitigation.
How Can a Water Fund Obtain Non-Financial Support?
Not all relationships involve financial support. A Water Fund might enter into an agreement with a for-profit organization to modify its business practices in order to improve conservation outcomes. For example, a water fund might enter into an agreement with a farmer that requires the farmer to change the timing and use of water for irrigation in order to benefit wildlife. Or, a water fund might enter into an agreement with a corporation that enables the corporation to achieve, say, water discharge quality requirements through methods with positive environmental consequences. For example, a corporation could preserve wetlands for natural water filtration rather than build additional treatment facilities. Finally, some for-profit organizations are subject to laws or court orders that require them to offset pollution caused by their activities. Water funds can provide opportunities for these organizations to pay others to reduce their generation of contaminants, in cases in which it would be inordinately burdensome or costly for the for-profit organization to change its own activities.