Finding a corporate sponsor to bankroll all or part of your nonprofit’s special event isn’t easy to come by. So, once you line up a sponsor, you’ll likely be in proverbial heaven. But, wait ― don’t feel too blissful. Your organization must carefully abide by the requirements for a qualified sponsorship payment exception or it could, in the end, face unrelated business income tax (UBIT).
Qualified sponsorship payments
Generally, “qualified sponsorship payments” received by a nonprofit are exceptions to what’s considered unrelated (trade or) business income (UBI). A qualified sponsorship payment is a payment of money, transfer of property or performance of services with no expectation that the sponsor will receive any “substantial return benefit.” Benefits returned to the sponsor can include advertising; goods, facilities, services or other privileges; rights to use an intangible asset such as a trademark, logo or designation; or an exclusive provider arrangement.
To be considered “substantial” by the IRS, the aggregate fair market value (FMV) of all benefits given to the sponsor during the year must exceed 2% of the sponsor’s payment to the nonprofit. If the total benefit exceeds 2% of the payment, the entire FMV of the benefits (not just the excess amount) is a substantial return benefit.
“Use” or “acknowledgment”?
The regulations specify for purposes of the exception that a not-for-profit’s “use or acknowledgment” of a sponsor’s name, logo or product lines associated with the sponsored event won’t constitute a substantial return benefit to the sponsor. Your organization’s use or acknowledgment (as opposed to promotion, marketing or endorsement) can include:
- The display of the sponsor’s brand or trade names and product or service listings, as well as a listing of the sponsor’s locations, telephone numbers or website address,
- Logos and slogans that contain no qualitative or comparative descriptions of the sponsor’s products, services, facilities or company such as “the best car insurance money can buy,” and
- Display or distribution of the product itself, free or for remuneration (at the sponsored event), if there’s no agreement to provide the sponsor’s product exclusively.
Additionally, keep in mind that payments made in connection with a trade show or convention aren’t qualified sponsorship payments, nor are contingent payments. If a sponsor’s payment is dependent on event attendance, broadcast ratings or other measures of public exposure to the sponsored activity, the payment falls outside the exception.
Substantial return benefit
When a sponsorship comes with a substantial return benefit, only the part of the sponsor’s payment that exceeds the substantial return benefit is considered a qualified sponsorship payment. The remainder is UBI.
Consider, for instance, a not-for-profit that receives $50,000 from a sponsor to help fund an event. The organization recognizes the support by using the sponsor’s name and logo in promotional materials. It also hosts a dinner for the sponsor’s executives, and the FMV of the dinner is $1,500, exceeding 2% of the sponsor’s payment.
The use of the sponsor’s name and logo constitutes permissible acknowledgment of the sponsorship, but the dinner is a substantial return benefit. As a result, only that portion of the sponsorship payment that exceeds the dinner’s FMV, or $48,500, is an exempt qualified sponsorship payment.
Follow the rules
Properly executed, sponsorships can benefit both sponsor and organization. But if your nonprofit doesn’t follow the rules for the IRS exception carefully, a sponsorship can be deemed paid advertising and your organization could end up liable for UBIT.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.