Can our nonprofit theater company sell advertising space in our programs without jeopardizing the (c)(3) status?
Probably. The IRS considers virtually all advertising that is regularly carried on (and including it in the program for each performance would be regularly carried on) to be unrelated business taxable income. A charitable organization is allowed to have some non-charitable activity so long as it is not a substantial activity. There is no precise definition of “substantial,” but if you carry on a full theatrical program and receive both grants and fees for admission, it is unlikely that your advertising activity will be a substantial activity. (See Ready Reference Page: “Nonprofits Worry About UBIT.”) If it is, you can always spin it off into a for-profit, but you will have a lot of time to consider that.