Is corporate sponsorship income taxable or a charitable contribution?

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The IRS will look at the payment made to a nonprofit by a corporate sponsor and decide whether the payment is a tax-free gift (charitable contribution) or a taxable advertising payment. The IRS focuses on whether the corporate sponsor has any expectation that it will receive a “substantial return benefit” for its payment. If so, the payment will result in taxable income for the nonprofit that is reported on IRS Form 990-T. (See rules described in Internal Revenue Code, Section 513(i).

Click to view the full-size infographic on Corporate SponsorshipIdeally the payments would be structured and documented so that the IRS classifies the payments as charitable contributions that support the fulfillment of the nonprofit's mission. One way to ensure that the payments are not taxable is to tailor the sponsorship so that the payments meet the IRS definition of "qualified sponsorship payments." A qualified sponsorship payment is acknowledged by the charitable nonprofit in the same way as any other charitable donation. (See the IRS website for more information regarding acknowledging contributions.) However, if the payment to the nonprofit does not meet the requirements of qualified sponsorship payments, such as because the sponsor receives a “substantial benefit” in return for the sponsorship, the revenue will be classified by the IRS as taxable income.

These factors may result in taxable income:

  • Exclusivity: if a nonprofit promises a for-profit that it will be the “exclusive” sponsor, that promise may trigger a finding of “substantial return benefit” if the IRS finds that being the exclusive sponsor confers a substantial benefit on the sponsor. (See IRS guidance on Exclusive Provider Arrangements.)
  • Providing prices, indications of savings or value, endorsements, or inducements to buy a sponsor’s products or services.
  • Providing a link from a sponsor’s name/logo on the nonprofit’s website to the page of a sponsor’s website where a product or service is sold, or listing the phone number where the product or service can be ordered.
  • Providing more than token services or other privileges to the sponsor in return for its sponsorship payment, such as tickets to an event that are complimentary and not otherwise available to the public, or lavish receptions (!).
  • Accepting a payment from a corporate sponsor that is contingent upon the level of attendance at the nonprofit’s event.
  • Providing sponsors with advertising or acknowledgments in a nonprofit’s regularly scheduled and published materials, such as an eNewsletter.
  • Corporate sponsorship payments that are provided in return for specific advertising opportunities.

Factors that do not automatically result in taxable income:

  • The sponsor’s name, logo, general phone number, locations, and internet address in printed media, or on a nonprofit’s website.
  • Value-neutral displays of a sponsor’s products or services, or the distribution of free samples of a sponsor’s products at a nonprofit’s event. The nonprofit should not endorse the product/service.
  • A single static internet website link that takes the viewer only to the sponsor’s home page – not to a page where a product or service is marketed or sold.

Some payments are both taxable and non-taxable:

Payments from a business sponsor can actually be a mixture of charitable contributions and advertising. For example, while it is fine to acknowledge a corporation's support for a conference or special event with a banner and a public 'thank you' from the podium, if the sponsorship “package” also includes a full page 'ad' in the conference brochure, with text written by the corporation that promotes its products and services to attendees at the conference, at least some of the corporate sponsorship payment is likely to be considered advertising income. In such cases the nonprofit will have to report that portion of the income as "unrelated business income" ("UBI"), subject to tax ("UBIT" = "unrelated business income tax"). The following resources will help you distinguish between acknowledgments and advertisements as well as better understand the implications of both.

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