Nonprofit organizations commonly use corporate sponsors for their events and ongoing relationships. This relationship is beneficial to both the nonprofit for money for various expenses and corporations for branding and increased sales. Yet, the IRS has certain rules in order for nonprofit and for profit corporations to understand what is taxable and not taxable is such relationships.
While this article is going to address only Corporation Sponsorships with nonprofit organizations, it is important to understand Unrelated Business Income for this discussion.
Why is Unrelated Business Income in the law? UBI laws started in the 1950s and have been changed a bit through the years. There was concern that nonprofit corporations would compete with for-profit corporations for income. The IRS wanted to distinguish between what is for-profit activity and what is nonprofit activity and prevent nonprofit organizations from having an unfair advantage in the selling of products. This later applied to other types of for profit activity as well.
And what is it?
Unrelated business income is defined as an activity that meets three requirements:
- Trade or Business defined as “any activity carried on for the production of income from selling goods or performing services. It is not limited to integrated aggregates of assets, activities, and goodwill that comprise businesses for purposes of certain other provisions of the Internal Revenue Code.”
- Regularly Carried On defined as “show(ing) a frequency and continuity, and are pursued in a manner similar to, comparable commercial activities of nonexempt organizations.”
- It is not substantially related to furthering the exempt purpose of the organization. “To determine if a business activity is substantially related requires examining the relationship between the activities that generate income and the accomplishment of the organization’s exempt purpose. Trade or business is related to exempt purposes, in the statutory sense, only when the conduct of the business activities has causal relationship to achieving exempt purposes (other than through the production of income). The causal relationship must be substantial. The activities that generate the income must contribute importantly to accomplishing the organization’s exempt purposes to be substantially related.”
How does this apply to Corporate Sponsorships?
Well, the IRS determined that sponsorships and agreements with the nonprofits could cause an excess benefit to the corporate sponsor and that’s not allowed without tax consequences.
The IRS said that advertising income is a taxable Unrelated Business Income. Agreements with corporate sponsors that extend advertising become Unrelated Business Income when:
- prices or information on savings on products is provided or the nonprofit endorses or induces to people to use the corporation products or services;
- an active placard or running banner indicating where to buy products or services of the corporation on the nonprofit website and maybe even the corporation’s contact information;
- providing a website link to the sponsoring corporation’s ordering of products and services page;
- the nonprofit gives access to events, services or other privileges like complimentary sports or theater tickets, lavish receptions, or extra golf expense benefits;
- providing goods or services of more than 2% of the total market value of a ticket/product/service or $74 (whichever is greater) of the total sponsorship payment (ie, if the fair market value of a ticket is $75 or more, the entire $75 or more may be taxable);
- the nonprofit accepts a corporate sponsorship payment is based on the level of attendance at an event, broadcast rating or level of advertising exposure;
- the nonprofit provides a corporate sponsor with advertising in a nonprofit’s regularly scheduled newsletter or other published material;
- exclusive sponsorship where the sponsor is the only company with the products to be sold.
Non Taxable: Acknowledgement
The IRS allows nonprofits to not pay taxes on corporate sponsors they acknowledge but not advertise. “ The IRS focuses on whether a corporate has any arrangement or expectation that such sponsor will receive any substantial return benefit….”.
Advertising includes the following:
- Acknowledgement of the corporate sponsors name, logo, slogans, brand/trade name, general phone number, locations and home page internet address.
- “Value-Neutral” displays (without pricing) of a sponsors products or services and they can distribute free samples of their products at a nonprofit event.
- an internet link to the home page of the corporate sponsor, but not to a place where they sell their products and services, but they can list their products and services.
- Right to be the only sponsor of an activity or representing a particular trade as long as they are not selling or promoting the selling of products of services.
- Giving products or services to the corporation that is insubstantial in nature, which is defined as less than $74 or having a fair market value of no more than 2% of the total sponsorship payment.
A couple of other quick tips:
- Don’t combine advertising with acknowledgement. If you are going to advertise, understand that you have to pay taxes on that income. Don’t use the word advertising in your acknowledgements or your paperwork to get sponsors.
- Don’t induce or endorse your participants to buy from a company.
- Develop a Corporate Sponsorship Policy that includes the IRS rules.
- Sign contractual agreements with all of your sponsors including the IRS rules. Corporations don’t always know the nonprofit tax law.
- Corporate sponsors are worth pursuing. These mutually beneficial relationships can provide long term support of your nonprofit organization. Remember to share with your corporate sponsors the possible tax implications to and set up an agreement.