Corporate Sponsorships: Tax-free Gift or Taxable Income?

Done right, corporate sponsorships can pay off for both the nonprofits that receive funding and the sponsors that receive valuable branding opportunities. Done wrong, though, your organization could end up on the hook for unrelated business income tax (UBIT). You need to understand how to navigate the nuances before you wade in.

Identify qualified sponsorship payments

Under the Internal Revenue Code — Section 513(i) — “qualified sponsorship payments” aren’t subject to UBIT. The term refers to payments of money, property transfers or the performance of services by a business without an expectation or arrangement that the business will receive any “substantial return benefit” in exchange.

Sponsored activities may include a single event, a series of related events, an ongoing activity or continuing support of a nonprofit’s operation. A qualified sponsorship payment doesn’t have to relate to the organization’s exempt purpose. A “substantial return benefit” generally is any benefit other than an acknowledgment. It includes advertising; goods, facilities, services or other privileges; the rights to the nonprofit’s trademark or logo; and exclusive provider arrangements.

Note that an exclusive sponsor arrangement isn’t a problem. You can agree that a certain sponsor will be the only sponsor for your activity. But you can’t, for example, agree to limit the availability of products provided by the sponsor’s competitors at your event. The latter scenario usually results in a substantial return benefit.

If a sponsor will receive a substantial return benefit, only the part of the payment that exceeds the fair market value (FMV) of the benefit is a qualified sponsorship payment. If you can’t establish that the payment exceeds the FMV, no portion of the payment constitutes a qualified sponsorship payment. Qualified sponsorship payments also don’t include payments:

  • Contingent on the degree of public exposure, such as the level of attendance at your event, broadcast ratings or similar factors,
  • That entitle the sponsor to use its name or logo in your regularly scheduled and printed periodicals, such as magazines or e-newsletters (as opposed to materials published only in connection with a specific event), or
  • Related to convention or trade show activities.

If part of a payment is qualified and part of it isn’t, the IRS will treat the portions as separate payments.

Differentiate between advertising and acknowledgments

The IRS has pinpointed the primary issue presented by corporate sponsorships: distinguishing qualified sponsorship payments and the related acknowledgment of sponsors from the sale of advertising. Advertising is defined as any transmitted, published, displayed or distributed message or programming material that promotes or markets a business, service, facility or product.

An acknowledgment is intended only to identify the sponsor — not promote its products, services or facilities. Acknowledgments don’t have to be as bare bones as you might expect, though. They can include the sponsor’s logo, slogans, brand or trade names; locations and phone numbers; product service listings; and value-neutral descriptions of its product line or services. An acknowledgment also can include a sponsor’s website URL. It can link to the website’s home page, but not to the page for a particular product or service.

Try to avoid comparative or qualitative descriptions — for example, “the best software for nonprofits.” The IRS considers a message that includes comparative or qualitative language and an acknowledgment to be advertising.

Finally, your acknowledgments shouldn’t include price information, indications of savings or value, or an endorsement or inducement to buy, sell or use the sponsor’s products or services. But mere display or distribution of a sponsor’s product at a sponsored activity isn’t considered to be such an inducement.

Proceed with caution

At a time when many nonprofits face funding gaps, and some experts predict that a recession looms on the horizon, corporate sponsorship dollars can be appealing. It’s critical, though, that you take care when crafting such arrangements. A seemingly small misstep could result in an unexpected tax bill.