Nonprofit Accounting Basics

Corporate Sponsorships: Do Them Right and Avoid Tax

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Exempt organizations, both large and small, are relying more and more on a variety of corporate sponsorships to provide much-needed support for events and programs. Properly structured, these sponsorships can provide that support and avoid or minimize tax on unrelated business income (UBI).

In regulations released in 2002 (IRC Reg. §1.513-4), the IRS created something of a safe harbor for corporate sponsorships. These regulations define a qualified sponsorship payment as a payment for which the sponsor receives no substantial return benefit other than mere acknowledgement by the organization. Acknowledgement, however, can include more than just a thank you. The acknowledgement can include:

  • the sponsor’s name and logo
  • contact information and locations
  • general description of the company’s products or services,
  • even slogans (if they do not contain qualitative or comparative descriptions of the company’s products or services)

The major risk with acknowledgement messages is the acknowledgement will contain an inducement to buy the sponsor’s products or services. When this occurs, the acknowledgement crosses the line into advertising and becomes taxable as UBI. Endorsement by the nonprofit of a sponsor’s products also makes the acknowledgement a taxable advertising message. But a properly crafted acknowledgement can contain significant information about the sponsor without becoming advertising. Additionally, an exclusive provider arrangement as part of a sponsorship agreement will generally be a taxable return benefit. However, an agreement which makes the sponsor the exclusive sponsor of an event does not, of itself, make the sponsorship a return benefit.

Many sponsorship agreements are quite complex arrangements with a number of different elements. A hypothetical “gold level” sponsorship for a major meeting might, for example, include the following elements for a $50,000 payment:

  • a large banner acknowledging the sponsor on the main speaking platform
  • free admission to the meeting for six employees of the sponsor
  • a free booth at the vendor trade show next door to the meeting
  • two free full-page ads in the organization’s quarterly journal
  • the printing of its logo on tote bags given to meeting participants.

Obviously, many of these items are a substantial return benefit to the sponsor. How are they considered in terms of taxability?

The regulations allow an organization to allocate this kind of payment into various portions which are then analyzed for tax. In our hypothetical example, the banner and the logo on the bags (as long as not containing inducement-to-buy language) will clearly be mere acknowledgement of the sponsor. One has to peel back the other elements of return benefit to ascertain what would be taxable since not all return benefit is taxable. The free admission to the meeting has a value, but generally would not be taxable because the meeting is part of the organization’s exempt purpose and the organization typically charges admission for participants (with the income being related to its exempt purpose). Likewise, the trade show booth would likely not be taxable since income from qualified trade shows in conjunction with educational meetings is considered income related to the exempt purpose. That leaves us with the two full-page ads. The value of this would clearly be taxable advertising UBI.

How does one calculate the value of these items? The regulations say fair market values for the returns must be utilized. Thus the regular price of the six tickets, the trade show booth, and cost of the two ads would be considered. The amount for the tickets, the trade show booth, and the ads would be subtracted from the total $50,000 payment and the remaining amount would be qualified sponsorship and considered a contribution for purposes of the organization’s Form 990. The fair market value of the advertising would be added to the advertising income sold by the organization and made a part of its tax calculation reported on its Form 990-T. The value of the tickets and trade show booth would be booked as non-taxable meeting revenue and qualified trade show revenue respectively.

The regulations contain several very good examples of a variety of sponsorship issues and are written in understandable English. Of note, one of the examples addresses website acknowledgements of sponsors, something that has become very common. In this example, the IRS says t a “click through” logo that takes the user onto the sponsor’s website is permitted as long as there is not an endorsement by the nonprofit on its website or the sponsor’s website. Another important item in the regulations is an exception which occurs when an acknowledgement appears in a periodical: this will almost always be considered as advertising, even if it does not contain inducement-to-buy language.

If you are considering corporate sponsorship programs (or you are already involved with them) it is important to be aware of the rules. It is fairly easy to avoid or minimize tax if these rules are considered when the program is in development. We urge you to become familiar with these important regulations.