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Corporate Sponsorships: Considerations for Tax-exempt Organizations

This is an article I wrote for the NYSSCPA Tax Stringer Magazine

Corporate Sponsorships: Considerations for Tax-exempt Organizations
By John Vazzana, CPA

Link to Article

In this time of economic uncertainty and reduced funding, tax-exempt organizations have been scouring for additional funding sources in order to maintain their programs and services and have been turning to corporate sponsorships to fill the gaps. With corporate sponsorships, tax-exempt organizations obtain funds to pay for expenses of an event or program. In return, the sponsor gets exposure, low cost marketing and image benefits, such as being viewed as a good corporate citizen.

Soliciting and receiving a qualified sponsorship payment (QSP) is not an unrelated trade or business, and those payments are not subject to unrelated business income tax (UBIT). When dealing with sponsors, organizations will often see the “business approach” of the sponsoring corporation; when spending sponsorship dollars, companies want to maximize the exposure benefits they receive and therefore the exposure to their products or services. Because any small changes in wording or actions can easily turn a QSP into a payment for advertising, corporate sponsorship income has been the subject of scrutiny by the IRS. Organization must exercise prudence when structuring sponsorship arrangement.

The rules defining what can be classified as a QSP are set forth in IRC section 513(3)(i) and clarified in Regulations 1.513-4. These statutes define a QSP as any payment made by a business (to an exempt organization) when there is not a substantial return benefit (SRB) to the sponsor except for an acknowledgement. Because advertising is considered a SRB, acknowledgements need to adhere to the parameters, explained in regulations 1.513-4(c)(2)(iv), to not be considered advertising. Displaying names, logos and slogans of the sponsor are acceptable ifthey do not contain “qualitative or comparative descriptions.” Any endorsement or inducement to buy or use the sponsor’s products would be considered for advertising.

To demonstrate, these below acknowledgements would be deemed acceptable to classify as a QSP:

  • CCV Corporation is a proud sponsor of ABC Organization.
  • MRV Corporation, a workshop partner, is now a proud sponsor of the Feed the Hungry Program.
  • PJV Inc. provides generous funding to support military families through our Connect Initiative, as well as new programming to help our country's most vulnerable children and families stay healthy and eat well on a limited budget.

In contrast, the following acknowledgements would be deemed to be advertising, because they have advertising components:

  • Tony’s Pizzeria, Brooklyn’s best, is a generous supporter of ABC organization’s Youth Programs.
  • Restaurant Italiano is a proud support of ABC Organization. Be sure to stop by for their lunch specials.

Logos or slogans that contain qualitative or comparative descriptions, that are an established part of the sponsor’s identity, would not be considered advertising as in the following example:

  • The Hunger Program is sponsored by Brooklyn’s Best Car Service (where Brooklyn’s Best Car Service is the sponsor’s known business name).

In acknowledging a sponsor, displaying a list of the sponsor’s locations, telephone numbers and their internet address will not prohibit a payment from being a QSP. Online acknowledgements that contain a hyperlink to a sponsor’s website will not be considered an endorsement and therefore will not normally disqualify a payment from being a QSP. The regulations, however, give an example where a tax-exempt organization provides a link to the sponsor’s website and on the sponsor’s webpage there is language which implies that the organization endorses the sponsor’s products. If that was done with the tax-exempt organization’s knowledge, it is considered advertising.

Acknowledging a company as an “exclusive sponsor” does not exclude the payments from being a QSP (e.g., ABC Corp is the exclusive sponsor of this year’s Hungerthon). “Exclusive provider arrangements,” which place a limitation on the sale of competing products or services, will be considered a SRB, however. Nevertheless, the regulations specify that merely displaying or distributing a sponsor’s products (including free giveaways) are not considered exclusive provider arrangements.

In addition to advertising, a sponsor could receive a SRB from receiving goods, services or other privileges from the exempt organization (e.g. tickets to an event or use of an organization’s facilities). For this, there is a de minimis exception which entitles any organization to provide a sponsor with benefits that have a fair market value of 2 percent or less of the amount of the sponsor’s payment.

Allocating a Payment between QSP and Advertising
If there is a SRB, only the portion of the sponsor’s payment equal to the fair market value (FMV) of the SRB would not be considered a QSP. In the event that an acknowledgement does not meet the parameters set forth in the IRC and is classified as advertising, only a portion of the sponsor’s payment equal to the FMV of that advertising would not be a QSP, such as when a company sponsors an event by giving an organization $5,000.In that example, an acknowledgement on the organization’s website contained qualitative language and therefore the acknowledgement was considered a SRB of advertising. If a similar-sized web advertisement would cost $200, then $4,800 of the $5,000 sponsorship payment would be a QSP and $200 would be advertising revenue. If the FMV of the advertising is greater than the sponsor’s payment, none of the payments would be considered QSP. The same would be true if the sponsor received another SRB, such as tickets to an event. In the case when the FMV of the SRB received by the sponsor is over the de minimis exception amount of 2 percent, the QSP amount is reduced by the entire FMV of the SRB (not just the excess).

Payments that don’t not fall under the QSP safe harbor rules are not automatically subject to UBIT. The UBIT determination of any payments that are not QSPs is then is determined under IRC 512, 513, and 514 (i.e., the volunteer labor or convenience exceptions may apply). QSPs are also treated as contributions received when determining public support under section 70(b)(1)(A)(iv) (see Form 990 Schedule A part 2) or under section 509(a)(2) (see Form 990 Schedule A part 3).

With proper planning, unintentionally having sponsorship payments become taxable can be avoided. Organizations can prepare written corporate sponsorship agreements that limit acknowledgments to within the guidelines of the QSP rules. If a sponsorship does trigger UBIT, tax preparers need to be aware of 990T reporting requirements. Additionally, auditors of tax-exempt organizations should also be aware of these rules for reporting liabilities for the associated taxes on the organization’s financial statements. Accountants serving tax-exempt organizations are in the best position to provide value added services by reviewing sponsorship arrangements to help manage and understand UBIT implications.

John Vazzana, CPA, is the principal at John Vazzana CPA PLLC, a boutique accounting firm specializing in serving not-for-profit and tax-exempt organizations. Vazzana is a member of the NYSSCPA, NJSCPA and the AICPA. He currently serves on two NYSSCPA committees: Exempt Organizations and Not-for-Profit Organizations. Vazzana holds a BS in accounting from CUNY Brooklyn College and an MS in taxation from CUNY Baruch College. More information and contact details can be found at www.JVCPAPLLC.com.

Copyright 2012 New York State Society of Certified Public Accountants.