Does Your Nonprofit Owe Tax on Its Sponsorships and Advertising?

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By: Whitney Hodge

Published: September 7, 2021

Many nonprofits pursue corporate sponsorships, which offer amazing opportunities and open new doors for them. But, in some cases, those sponsorships can be considered paid advertising by the IRS, causing nonprofits to be required to pay taxes on those sponsorships. 

Today, we will take a closer look at these regulations and find out how they may affect your nonprofit organization.

Does Your Nonprofit Owe Taxes?

The answer to this question is no if your activity doesn’t cross the line into what the IRS considers advertising. You owe money on advertising, but not on sponsorships. Qualified sponsorship payments are considered exempt, but advertising revenue is considered unrelated business income, making it taxable. 

What Qualifies as Sponsorship?

The Qualified Sponsorship Payment exception is taxed because the payments are not considered income from an unrelated business or trade. Qualified sponsorship payments are payments of money, property transfers, or performances of services without expectations that the sponsor will gain any “substantial return benefit.” 

Essentially, a payment qualifies as a sponsorship if the sponsor doesn’t gain any substantial benefits in return. 

The benefits the sponsor gets back can include goods, advertising, services, facilities, or other benefits. They can also include access to essential designations, or a specific provider arrangement. 

The IRS will consider payments substantial when the aggregate fair market value (FMV) of all benefits given to the sponsor throughout the year exceeds 2% of the total payment from the sponsor. If the benefit exceeds 2% of the payment, all FMV benefits are considered substantial return benefits. 

What qualifies as a “Use or Acknowledgment” provision?

A nonprofit’s “use or acknowledgment” of a sponsor’s logo, name, or product lines is specified in the regulations as an exception when it won’t result in a substantial return benefit to the sponsor. An organization’s use or acknowledgment might include the following:

  • They are Slogans and logos when they don’t include qualitative or comparative information of the sponsor’s facilities, products, services, or company. 
  • A detailed list of the sponsor’s telephone numbers, locations, or website address. 
  • Descriptions of the neutral value of the sponsor’s product line or services
  • The sponsor’s trade or brand names and service or product listings. 

Sponsors’ products can be included in the sponsored activity when there’s no option to exclusively give the sponsor’s product exclusively. Simple distributions and displays of a sponsor’s product at an event, whether free of charge or remuneration, isn’t considered a persuasion to purchase, use, aren’t, or sell the product. The determination of whether the qualified sponsorship payment applies will not be affected.  

Remember that contingent payments aren’t considered qualified sponsorship payments. Suppose the sponsor’s payment is contingent on broadcast ratings, event attendance, or other means of public access to the sponsored activity. In that case, the payment is not considered to be within the terms of the exception. 

What are “Sponsor Payments Allocations?”

When sponsorships include substantial return benefits, the only portion of the sponsor’s payment exceeding the substantial return benefit is considered a qualified sponsorship payment. The leftover amount is unrelated business income. 

For example, a nonprofit obtains a substantial payment from a sponsor to fund an event and the sponsor’s logo and name in promotional items. The organization hosts a dinner for the sponsor’s management, and the FMV of the dinner goes beyond the 2% of the sponsor’s payment. 

Using the sponsor’s name and logo is considered permissible notoriety of the sponsorship. The dinner is considered a substantial return benefit. The only portion of the sponsorship payment exceeding the dinner’s FMV is an exempt qualified sponsorship payment. Every Situation is Unique.

The IRS hosts whole publications dedicated to unrelated business income. It’s a complicated subject. The information in this article is simple and broad. To consider corporate sponsorship income as advertising revenue depends significantly on specific circumstances and facts. 

Our best advice is to contact a tax professional to help you get through the details and find out what is considered taxable or not and how to proceed with your organization. 

Trust Lloyd & Hodge With Your Tax and Accounting Needs

Running a nonprofit isn’t a walk in the park, especially when it’s time to figure out your taxes. There are numerous ways to reduce your tax liability, but learning the ‘secrets’ to tax savings can be near impossible if you aren’t familiar with the ins and outs of the US tax system.

Lloyd & Hodge know how stressful accounting and taxes are for many nonprofits, small businesses and sole proprietors. We know you’d rather focus on growing your business, and we understand that taxes are something most people would rather not think about. 

With proper planning, you can manage your effective tax rate and reduce your costs. Tax planning and restructuring services from Lloyd and Hodge are designed to protect your business’s financial future while maintaining compliance with all laws and regulations.

We can work with you remotely! We use the latest in technology and security so we can handle your accounts remotely without ever needing to make a trip to our office! Contact us today and find out how you can reduce your tax liability and plan for your future.

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