Corporations and other businesses frequently display public support for the charitable causes of tax-exempt entities. Often this support takes the form of sponsorships, whereby the business provides cash or noncash donations to the tax-exempt entity and receives acknowledgement of that support. The tax-exempt entity receives the much-needed donation that will help it fulfill its tax-exempt purpose, and the for-profit business receives the positive public perception of supporting the charitable cause. This seems like a win-win situation, and often it is.
However, it is important that both entities understand the fine line between classification as a sponsorship versus advertising. One might ask: Why does it matter? It matters because revenues received for advertising are unrelated business income (UBI) when received by a tax-exempt entity, and net UBI is subject to a 21% income tax rate. When those dollars are taxed, it can greatly reduce the funds available for a tax-exempt entity to administer its charitable purpose.
Sponsorships: What Are They, and How Can We Get There?
Internal Revenue Code (IRC) Section 513(i) provides an outline for sponsorships—what they are and when they are “qualified.” A tax-exempt organization should ensure that the funds it receives from corporate donors are qualified sponsorship payments (QSP), because such payments are exempt from UBI and income tax. A payment qualifies as a QSP if it is provided by a business, and there is no arrangement or expectation that the business will receive a substantial return benefit from the payment.
One might then ask: How does the business receive acknowledgement for the donation? Fortunately, the IRC allows for recognition of the donor and, to an extent, the products or services it produces. Simply, the tax-exempt entity may recognize and publicly acknowledge the donation by displaying the corporate name, logo, or product, so long as the acknowledgement does not include any of the following:
- Qualitative or comparative language about the business’s products
- Prices or indication of savings or value
- Endorsement of the business’s products, or inducements to purchase or use the business’s products or services
Any language that is displayed must be strictly value-neutral and fact-based. As an example, the tax-exempt entity may state: ABC Company, maker of auto parts, supports this event today. Stating the name of the business and its products is acceptable. However, a statement such as this, is not: Be sure to shop at ABC Company, which makes the best auto parts, because it supports this event today. In the latter example, the tax-exempt entity is effectively advertising for ABC Company by providing both encouragement to shop at ABC Company and an endorsement that ABC Company’s products are the best.
One exception to the QSP rules involves ongoing acknowledgement. If the donation affords the business the right to have its name or logo included in regularly scheduled printed materials (such as periodicals) published by the tax-exempt organization, then the payment is not a QSP. For this purpose, printed material includes material that is published electronically. Therefore, a tax-exempt organization that regularly publishes a paper or online magazine should avoid ongoing recognition of the corporate donor within the publication’s graphics or text.
Advertising: What Is It and How Do We Avoid That Classification?
A tax-exempt entity is not expressly forbidden to engage in advertising for other entities; but, when it does, the revenue received is UBI and subject to income tax. Most tax-exempt entities do not want either the tax liability or the negative public exposure of advertising. Therefore, they try to ensure that the acknowledgement of corporate donations is not classified as advertising. The first step toward that goal is to ensure that any messaging related to the corporate donor does not include any of the three items in the bullet points of the previous section. Failing any one of those three tests puts the activity into the realm of advertising; and, thus, the related revenue is UBI.
Identification or acknowledgment of the sponsoring business is not advertising. Displaying the business’s logo, name, internet address, or product is not advertising. The tax-exempt entity may display the corporate donor’s:
- Logo
- Name
- Location
- Internet Address/Website
- Telephone Number
- Trade Names
- Product Descriptions
The key is remaining factual and identifying the donor and primary business elements without displaying any promotion, endorsement, or encouragement to use the product or services produced by the business. In addition, sponsoring businesses may provide free products for distribution by a tax-exempt entity to attendees of its fundraising events. This is not considered an endorsement of the product.
The Thin Green Line
The distinction between qualified sponsorship payments and advertising revenue is not always crystal clear. An organization should always ask: Is this language fact, or is it an opinion? If any part of the language or acknowledgement crosses the line into territory considered an advertising endorsement, then the tax-exempt entity could end up remitting some of its “green” in the form of income taxes. It is an all-or-nothing scenario, so the tax-exempt organization should consider every word in every message to safeguard that no part of it is advertising. If you have questions about sponsorships and advertising, or would like assistance with any matter involving tax preparation and accounting, contact a PYA executive below at (800) 270-9629.
© 2020 PYA, P.C.
No portion of this article may be used or duplicated by any person or entity for any purpose without the express written permission of PYA.
