Corporate sponsorship generally is a beneficial arrangement for the charities, think tanks, and other tax-exempt organizations, as well as the corporations sponsoring them. Generally, the for-profit business pays funds to the charitable organization to further its mission, which provides much-needed financial support and, in some cases, media attention. In turn, the charitable organization publicly acknowledges that the business has supported its mission, programs, or special event, which could benefit the for-profit business through new customers or increased business.
While a corporate sponsorship can be quite advantageous for all parties involved, it does trigger some implications that charitable organizations must understand before engaging in this complex project. Failure to be aware of these rules can lead to tax liability for your charitable organization, think tank, or 501(c)(3) organization.
Tax Consequences of Corporate Sponsorship
When your tax-exempt organization receives corporate sponsorship money, you need to accurately determine whether the payment is a charitable donation or is actually advertising revenue, which would trigger a tax liability for unrelated business income. Your charitable organization may prefer that corporate sponsorship payments be non-taxable revenue, particularly if the amount received is so small that the bookkeeping required to determine and pay for the unrelated business income is more work than desired. However, you must structure these payments carefully to meet all applicable IRS requirements for them to be non-taxable. Of course, charities should not shy away from raising money from unrelated business income. Very often, new revenue sources through advertising can provide much needed (but taxable) revenue!
Qualified Sponsorship Payments
Taking steps to ensure that payments from corporate sponsors meet the IRS definition of qualified sponsorship payments is the best way to make certain that they are non-taxable. When a corporation makes a qualified sponsorship payment to a charity, it does not expect to receive any substantial return benefit in exchange for its payment. A “substantial benefit” is anything other than use, an acknowledgment, or another “disregarded” benefit.” For instance, qualified sponsorship payments might include the following:
- Logos or slogans without qualitative or comparative descriptions;
- Single internet links to the corporation’s main homepage but not to a page that markets or sells products;
- Product locations, addresses, display, and/or distribution; and
- Value-neutral descriptions, including brand or trade names or listings.
Taxable Corporate Advertising Payments
Unlike qualified sponsorship payments, corporate advertising payments subject a charity to unrelated business income tax. Unlike non-taxable payments, advertising is payment for any messages or other materials that promote or market a trade, business, service, facility, or product. Advertising messages often contain qualitative or comparative language, information on the price, savings, or value of a product or service, and language indicating some endorsement, inducement, or encouragement to use the company’s product or service.
Some factors that may indicate that a corporate payment qualifies as advertising include the following:
- Exclusive sponsorship automatically results in a finding of substantial return benefit by the IRS;
- Inducements to buy a business’s products or services;
- Providing a link to a page on the business website where products are marketed or sold or a phone number for customers to call and order goods or services;
- Accepting a payment contingent on the amount of attendance at a charitable organization’s specific event;
- Providing a business with a specific advertising opportunity at no cost that usually would require payment.
Combinations of Donations and Advertising Payments
In some cases, a charity might receive payment from a business that is a mixture of a charitable contribution and an advertising payment. In response to the payment, the organization might display messages that acknowledge the corporate donation but also appear to endorse the corporation’s product. If a message contains elements of both acknowledgment and advertising, then the message still constitutes advertising that triggers unrelated business income that the IRS considers taxable. Therefore, in this instance, the charity would be liable for that portion of the sponsorship payment that qualifies as unrelated business income.
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