Many nonprofits dream of landing hefty corporate sponsorships to help pay for the costs of a conference, fundraiser or other costly event. Money from deep pockets is optimal, but you don’t want the IRS to consider the payments “paid advertising” and thus taxable as unrelated business income.
Defining the terms
Generally, “qualified sponsorship payments” received by a nonprofit are an exception from unrelated (trade or) business income (UBI). A qualified sponsorship payment is a payment of money, transfer of property or performance of services with no expectation that the sponsor will receive any “substantial return benefit.” Benefits returned to the sponsor can include advertising; goods, facilities, services or other privileges; rights to use an intangible asset such as a trademark, logo or designation; or an exclusive provider arrangement.
To be considered “substantial” by the IRS, the aggregate fair market value (FMV) of all benefits given to the sponsor during the year must exceed 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 (not just the excess amount) is a substantial return benefit.
The regulations specify for purposes of the exception that a not-for-profit’s “use or acknowledgment” (as opposed to promotion, marketing or endorsement) of a sponsor’s name, logo or product lines won’t constitute a substantial return benefit to the sponsor. Your organization’s use or acknowledgment can include:
Sponsor information. The sponsor’s brand or trade names and product or service listings may be displayed. Listing the sponsor’s locations, telephone numbers or website address also is permissible.
Logos and slogans. These pass the test as long as they contain no qualitative or comparative descriptions of the sponsor’s products, services, facilities or company such as “the best car insurance money can buy.”
The product itself. You can include a sponsor’s product at the sponsored activity as long as there’s no agreement to provide the sponsor’s product exclusively. Mere display or distribution of a sponsor’s product at an event, whether for free or remuneration, isn’t considered an inducement to purchase, sell or use the product (that is, advertising).
Value-neutral descriptions. These include displays or visual depictions of the sponsor’s product line or services.
Note: Contingent payments aren’t qualified sponsorship payments. If a sponsor’s payment is dependent on event attendance, broadcast ratings or other measures of public exposure to the sponsored activity, the payment falls outside the exception.
When a sponsorship comes with 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 UBI.
Consider, for instance, a not-for-profit that receives a large payment from a sponsor to help fund an event. The organization recognizes the support by using the sponsor’s name and logo in promotional materials. It also hosts 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 and logo constitutes permissible acknowledgment of the sponsorship, but the dinner is a substantial return benefit. As a result, only that portion of the sponsorship payment that exceeds the dinner’s FMV is an exempt qualified sponsorship payment.
The Internal Revenue Code provisions on UBI distinguish between “exclusive sponsor” and “exclusive provider” arrangements. An arrangement that acknowledges a corporation as the exclusive sponsor of a not-for-profit’s activity generally doesn’t by itself result in a substantial return benefit that could incur the unrelated business income tax (UBIT) for a nonprofit. Similarly, an arrangement that acknowledges a company as the exclusive sponsor representing a particular trade, business or industry won’t constitute a substantial return benefit on its own.
On the other hand, an arrangement with a sponsor that limits the sale, distribution, availability or use of competing products, services or facilities in connection with the nonprofit’s activity generally does result in a substantial return benefit. For instance, if the organization agrees in exchange for a payment to allow only the sponsor’s products to be sold in connection with an activity, the sponsor has received a substantial return benefit.
Accepting corporate sponsorship money can be lucrative but tricky. We can help you follow the rules to avoid paying UBIT in these situations. Give us a call today!