How to differentiate corporate sponsorships from taxable advertising

Corporate sponsorships can help cover costs for your nonprofit’s events, programs and other initiatives. But before accepting sponsorship dollars, you should understand the tax implications. Although many sponsorships qualify for an exception from unrelated business income tax (UBIT), if any part of the payment is for advertising, that can trigger UBIT.

Generally, qualified sponsorship payments your organization receives aren’t considered income from an unrelated trade or business. A qualified sponsorship payment is cash support, a property transfer or a performance of services with no expectation that the sponsor will receive substantial “return benefit.” Return benefits can include advertising, goods, facilities, services and exclusive provider arrangements.

The aggregate fair market value (FMV) of all benefits provided to a sponsor during the year may be disregarded if it’s less than 2% of the amount of the sponsor’s payment to the nonprofit. If the total benefit exceeds 2% of the payment, the entire FMV of the benefits is a substantial return benefit.

Avoid UBIT risk by using a corporate sponsor’s name for acknowledgment purposes only. Promotion, marketing or endorsement of the sponsor, on the other hand, constitutes a substantial return benefit.

In addition to supporters’ names, you can use their logos and slogans as long as they contain no qualitative or comparative descriptions. In general, value-neutral descriptions are usually acceptable. You can also list sponsors’ physical and online locations and phone numbers, and their brand or trade names and product or service listings. At the sponsored event, you may include a sponsor’s product as long as there’s no agreement to provide it exclusively.

When a sponsorship includes a substantial return benefit, only the part of the sponsor’s payment that exceeds the substantial return benefit is considered a qualified sponsorship payment. The remainder is unrelated business income.

Say, for example, you receive a large sponsorship payment and recognize the support by using the sponsor’s name in promotional materials. You also host a dinner for the sponsor’s executives, and the FMV of the dinner exceeds 2% of the sponsor’s payment. The use of the sponsor’s name constitutes a permissible acknowledgment. However, the dinner is a substantial return benefit. Only the portion of the sponsorship payment that exceeds the dinner’s FMV is exempt from UBIT.

In some situations, the difference between qualified sponsorship payments and advertising isn’t as clear. Contact us for help reducing UBIT risk.