The 501 S(c)ene

The latest view on not-for-profit accounting issues

Sponsorship vs. Advertising

Selling sponsorships at a special event can be a great way for a nonprofit organization to raise additional money.  Sponsorships are also beneficial for donors as donors can receive tax deductions while receiving public acknowledgement of their sponsorship.  Though this may seem like a great source of additional revenue for a nonprofit, there are a couple of things to keep in mind before your nonprofit organization begins to solicit sponsorships from other donors.

Nonprofit organizations are taxed on any income received that is unrelated to the nonprofit’s mission, otherwise known as unrelated business income tax (UBIT).  For instance, if a nonprofit organization receives money to advertise the products or services of another company, then the nonprofit organization would pay tax on the proceeds they receive to promote that particular company.  Classifying certain payments as sponsorships or advertising can be tricky.  Fortunately, the IRS has specified the difference between receiving payments for taxable advertising and payments qualified as sponsorships.

According to the IRS, a qualified sponsorship payment is “any payment made by a person engaged in a trade or business for which the person will receive no substantial benefit other than the use or acknowledgement of the business name, logo, or product lines in connection with the organization’s activities.”  For instance, if a nonprofit organization simply acknowledges the sponsor’s name, logo, and/or slogan, then the nonprofit organization would not have to pay tax on the income.

On the other hand, if the nonprofit organization promotes the sponsor’s products or services, then the sponsorship would be accounted for as an advertising expense; thus triggering unrelated business income tax for the nonprofit organization.  The IRS describes other activities that “promote” the sponsor’s products or services which include:
1. Messages containing qualitative or comparative language, price information, or other indications of savings or value
2. Endorsements
3. Inducements to purchase, sell, or use the products or services

As with other accounting and tax issues, the difference between sponsorship and advertising proceeds can be murky at times.  Having a clear understanding of the rules in advance of an event can ensure that you structure sponsorships correctly to avoid paying tax.

Danny Oertle

Comments

  1. Tammy Franklin says:

    Do these same rules apply in California? Are they Federal?

    • admin says:

      Hi Tammy,

      This blog post was stating rules according to the IRS, which are federal. Thank you for your interest in our blog!

      Colette Kamps, CPA