With some financial experts predicting that a recession looms on the horizon, corporate sponsorship dollars can be appealing. However, nonprofit organizations need to take care when crafting such arrangements — or possibly face an unexpected tax bill.

What are qualified sponsorship payments?

Under the Internal Revenue Code, qualified sponsorship payments aren’t subject to unrelated business income tax (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. 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.

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.

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.

What aren’t qualified sponsorship payments?

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. Income received in exchange for such sponsor benefits is generally subject to UBIT.

Are advertising and acknowledgments different?

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.

Do the right thing

A corporate sponsorship executed correctly can benefit both the nonprofit that receives funding and the sponsor that receives valuable branding opportunities. But if it’s not done right, your organization could end up paying UBIT. Contact us to help you navigate the process.