Accepting a corporate sponsorship to help fund one or a series of events or simply to provide ongoing support for your organization’s programs and operations can benefit both the organization and the corporation — if the sponsorship is arranged properly.
In addition to the corporate sponsor’s financial support, your organization may receive in-kind services and/or product donations, along with increased media attention that can boost public support for your mission. For the corporation, the sponsorship offers public recognition of the business’ charitable activities, which may help it attract new customers and enhance its reputation.
However, unless payments from the corporate sponsor are structured properly, your organization could be in for a tax surprise. Rather than being considered a nontaxable charitable contribution, the payments could be classified as taxable advertising payments and trigger unrelated business income taxes (UBIT) for your organization.
When determining whether sponsorship payments are nontaxable charitable contributions, the IRS focuses on whether the sponsor receives a “substantial benefit” in return for its payments. Your organization can help ensure sponsorship payments won’t be taxed by having them meet the requirements of the IRS’s “qualified sponsorship payments” safe harbor rule.
Under this rule, the corporate sponsor must provide the sponsoring funds, property, or services with no arrangement or expectation that it will receive any substantial benefit in return for the use of the sponsor’s name in connection with the nonprofit organization’s activities. Generally, a substantial benefit includes any benefit except:
- The use or acknowledgment of the sponsor’s name or logo in connection with the event
- Token items or insubstantial goods and services provided to the sponsor by the nonprofit
Potential Tax Triggers
To avoid UBIT when structuring a sponsorship, be aware of these possible tax triggers:
- Any inducements on your organization’s part to buy the sponsor’s products or services
- Free advertising opportunities for the sponsor in your organization’s periodic publication that your organization would normally charge for
- Any requirement making the sponsor’s payment to your organization contingent on a certain level of attendance at your event
Some sponsorship payments can be a combination of nontaxable qualified sponsorship payments and taxable amounts that are attributable to advertising income or deemed a substantial benefit to the sponsor.
For example, a local business pays your nonprofit $50,000 to sponsor an art exhibit you’re organizing. You give the business 15 passes to the event (total value, $225) and 15 passes to a dinner to kick off the event (total value, $1,125). In this situation, $1,350 of the $50,000 doesn’t meet the qualified sponsorship exclusion from tax. If this nonprofit is a 501(c)(3) organization the $1,350 is considered “Quid Pro Quo” and only $48,650 is a charitable donation deductible to the business.
The burden is on your nonprofit to make a reasonable and good faith valuation of any substantial benefit. Rely on our experience to help you meet your responsibilities, minimize your tax, and accurately estimate taxes you can’t avoid.
On the other hand, payments received by trade associations in connection with trade shows are excluded from unrelated business income under what’s called the “qualified trade show exception.”
IRS To Release Electronic Forms 990
In response to a district court ruling,* the IRS is working on digital technology to make searching for information about nonprofit finances and operations easier for the public. The IRS expects to have the new technology in place by early 2016.
The ruling is in response to a request by an advocacy group under the Freedom of Information Act (FOIA) to have access to data in machine-readable digital format from nine Form 990s filed electronically by certain nonprofit organizations. Shortly after the court granted the group’s request, the IRS said in a statement that it was taking steps to allow it to respond to future requests in a similar manner (while still protecting the confidentiality of certain information). Currently, more than half of all Forms 990 are filed electronically.
* Public.Resource.org v. United States Internal Revenue Service (N.D. Cal. 01/29/15)
If you have any questions about your nonprofit organization, please contact Warady & Davis LLP at (847) 267-9600.