As we enter the season of fundraising events, many organizations will not only hold events but also have corporate sponsors to help underwrite their events. The amounts the corporate sponsors pay can either be qualified sponsorship payments or taxable advertising.
You first need to understand that nonprofit organizations are taxed on income from unrelated business sources minus expenses incurred in generating the income. The organization is taxed at corporate tax rates. While this not by itself a bad thing, you can avoid the unrelated business income tax (UBIT) with some careful planning.
Fortunately, the IRS has issued regulations which define what is a qualified sponsorship payment and what is advertising. Activities that help promote private companies will usually be considered advertising.
A qualified sponsorship payment is one where the organization provides no benefits back to the sponsor. You can use the companies name, logo and product line and the payment will still be considered a payment. You can thank them for their support, but you cannot encourage people to go out and buy the corporation’s product or services.
If the payment is contingent on attendance at an event, broadcast ratings or some other factor indicating the degree of public exposure, the payment will be considered advertising rather than a qualified sponsorship payment. If the benefits going to the sponsor are less than 2% of the payment, they are considered insubstantial and the payment will qualify as a qualified sponsorship payment. If the company is the sole sponsor, the payment will still qualify as a qualified sponsorship payment.
Advertising would include the following:
- Qualitative or quantitative comparisons to other companies.
- Endorsements by the organization.
- Linking to the sponsor’s website
- Price information or other indications of value
RECOMMENDATION: When soliciting corporate sponsorship payments, enter into an agreement with the sponsor that outlines what your expectations are and what the sponsoring organization will get in return. This will protect the payments as qualified sponsorship payments and avoid UBIT.
We strongly recommend that you have an attorney review any agreement before you start using it. The difference between sponsorship payments and advertising is not always obvious. If you have questions, please call me for assistance.