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  • Steven Roy

Sponsorship or Advertising

The Issue:

  • Exempt Organizations solicit “Sponsors” for their events and programs.

  • The IRS draws a distinction between Sponsorships (donations the organization publicly acknowledges) and Advertising (a service the organization provides to the Payor).

Implications:

  • Short Term: The Organization and the IRS treat Sponsorships as Contributed Income. Advertising Income is generally treated as Taxable Income (Unrelated Business TI, UBTI). The organization must separately account for, report, and pay tax on the Net Income from Advertising.

  • Long Term: Publicly Supported 501(c)(3) Organizations compute a Public Support Ratio that determines whether they retain their favorable exempt public status. Contributed Income is beneficial to that calculation, Taxable Income is damaging.

Most often, Exempt Organizations’ interests are best served if the payors’ payments can be classified as Contributed Income rather than Taxable Income. This, in turn, requires that fundraisers and program staff recognize the difference between the two, and incorporate it in their discussions and agreements with funders.


The Primary Distinction:

Focus on the benefits the Sponsor-Advertiser receives from the Exempt Organization:


Sponsors receive only an “Acknowledgement” from the Exempt Organization i.e., The Exempt Organization may display the Sponsor’s

  • name, logo, slogan, and/or

  • a link or reference to the Sponsor’s website or business location, and/or

  • “value neutral” descriptions of products or services (including pictures or physical samples).

in a publication, broadcast, statement, or display. The Sponsor’s primary benefit from its Sponsorship is the “rosy glow of virtue” they get from their association with the Exempt Organization and its causes.


Advertisers receive a “Substantial Return Benefit” for their payment to the Exempt Organization. Substantial Benefits accrue if the Organization’s acknowledgement

  • includes comparative-qualitative statements, or

  • implies the product or service will provide value or savings, or

  • includes price information, or

  • endorses the product or service, or

  • makes payment contingent on click-through, attendance, impressions, or other metrics, or

  • pertains to a convention or trade show, or

  • establishes the Sponsor-Advertiser as the Exempt Organization’s Exclusive Provider for the Sponsor-Advertiser’s service or product.

Examples – Sponsorship Language

  • Name, Logo: (We’d like to thank) Our Sponsor – Hyundai Motors (With or without company logo or picture of a car)

  • Name and Slogan: Go for It – Nike (With or without company logo or a picture of shoes)

  • Name and Links: Bass Pros, North Hollywood, 818-386-xxxx (With or without company logo, web address, or pictures of fishing gear)

Examples – Advertising Language

Same Sponsor but added language that causes the acknowledgement to be treated as Taxable Income instead of Contributed Income. Generally, not the preferred outcome.

  • Comparative Language: (We’d like to thank) Our Sponsor – Hyundai Motors, Voted “Best in its class” by Auto Life Magazine (With or without company logo or picture of a car)

  • Endorsement: Go for It – Nike Bara May’s favorite running shoes. (With or without company logo or a picture of shoes)

  • Pricing Data: Bass Pros, North Hollywood, 818-386-xxxx 20% off on Baikalbass lures (With or without company logo, web address, or pictures of fishing gear)


Procedural Responses:

The organization’s Fundraising Policies and Procedures Manual includes a specific section about Sponsorships, including applicable content limitations.


Sponsor packages state the content limitation. Solicit sponsors by offering to display only acceptable information: Name, logo, slogan, links or addresses, phone number, content neutral product graphics.


Fundraising personnel review sponsor-submitted material for compliance with limitations or forward them to your tax advisor for review. If necessary, elements that fall outside the restrictions are negotiated out of our promised Acknowledgement.


If the Sponsor will not remove elements that fall outside the restrictions, either

  • Decline the Sponsorship, or

  • Forward the materials and sponsorship pages to your tax advisor for analysis and proper reporting of the taxable income they generate.

If the tax advisor deems it appropriate or necessary, report gross income from advertising, expenses of publication, and allocable overhead on IRS Form 990-T Exempt Organization Business Income Tax Return.


More Information:

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