Corporate Sponsorships – Possible Tax Implications
As corporate sponsorship revenues for not-for-profit organizations continue to increase, so does the issue of taxation. The question of whether this revenue is taxable is not as simple as one might think (thanks to the IRS). What it truly boils down to, and what the IRS is most concerned with, is whether the corporate sponsor has an expectation to receive a “substantial return benefit” for its sponsorship payments. If a substantial return benefit is provided, the IRS treats this revenue as taxable unrelated business income (“UBI”) for the not-for-profit organization in the form of advertising revenues for the not-for-profit organization.
So what forms of sponsorship are allowed before crossing into the world of UBI? As a general rule of thumb, raising awareness of the sponsor such as displaying its business name/logo, providing information about the products and/or services offered, or providing general business information such as website/contact info is acceptable, and is treated in the same way as a charitable contribution. These types of sponsorship are not subject to unrelated business income tax (“UBIT”) and are classified as “qualified sponsorship payments” by the IRS.
Now to the question all exempt organizations with sponsorships already in place worry about. What specific sponsorship agreements create taxable UBI? Taxable sponsorship agreements include: requirements to urge event goers to buy the commercial entity’s products or emphasize that the commercial entity has better or cheaper products; providing website links to a page which offers specific products or services; contingent sponsorships that are based on the level of attendance or viewership of an event/publication; and agreements that will provide the commercial entity additional return compensation, such as free services or merchandise with a value, in return for the funds provided. The IRS deems these situations to include a “substantial return benefit” and to be classified as UBI.
Another question that comes up is what if a sponsorship agreement has a mixture of both taxable and tax-exempt revenue? In these cases, a tax allocation must be done which details the amount of sponsorship dollars allocated to each activity. For example, if a commercial entity provides a $100,000 sponsorship, $50,000 of which is allocated towards displaying the corporate logo at an event with the remaining $50,000 allocated towards fully endorsing a specific line of products, this would result in $50,000 of qualified tax-exempt sponsorship payments and $50,000 of taxable UBI. This can get more and more complex depending on the type and amount of detail included in the sponsorship agreement.
To avoid unexpected tax liabilities, remember to review the actual agreement to make sure that what is expected to be provided to the commercial entity in return for the sponsorship is clearly understood.