Many nonprofits receive donations from corporations wanting to support their endeavors. These “corporate sponsorships” have been in question by the IRS as to whether or not they would be subject to certain taxes. The IRS released regulations concerning these corporate sponsorships in 2002 prompted by several rulings in court cases. The core of these rulings identify whether donations will be considered “corporate sponsorships” which are excluded from unrelated business income or considered advertising which would be subject to unrelated business income tax. The IRS would see advertising to be a “substantial return benefit”.
The bottom line is an exemption from the unrelated business income tax (UBIT) for donations that qualify as a corporate sponsorship. Income generating activities for Exempt organizations such as a trade or business which is regularly carried on; and unrelated to their exempt purposes will be subject to UBIT.
However, exclusions from UBIT do exist such as “corporate sponsorships” and provide guidelines for activates and/or actions for which taxes will not be incurred. The final rulings declared six elements of corporate sponsorship that would not be considered “substantial return benefits”.
- Listing the name, logo, or product line of the sponsor;
- Awarding exclusive sponsorship
- Providing logos or slogans that do not contain any qualitative language or comparative description of the products;
- Listing the payer’s locations, addresses, phone numbers, and Internet addresses;
- Providing value-neutral descriptions of the sponsor’s product display; and
- Listing the sponsor’s brands or trade names.
On the other hand, there are also four things that would be deemed substantial return benefits, including “advertising.” They are:
- Advertising;
- Designating a sponsor as an exclusive provider;
- Providing facilities, services, or other privileges to the sponsor unless they are of “insubstantial value;” and
- Granting either exclusive or nonexclusive rights to use the sponsor’s intangible asset (e.g., name or logo).
Let’s take a look at a hypothetical situation. The local little league, an NPO considered exempt is given a $2,000 donation from the local sporting goods store. In return a banner is created to display on the outfield fence of the home field. This banner contains the name of the store, its logo, and website address.
According to the regulations this banner would not cause the sporting goods store to be taxed and would qualify as a “corporate sponsorship”.
There are a few areas within the rules that can be tricky and cause problems:
- Substantial return benefits
- Services provided
- Internet issues
Substantial Return Benefits
The question of what is a substantial benefit can cause some confusion. According to the rule, if a sponsor receives anything in return for their donation it must have a value of 2% or less of the sponsorship payment. Should its market value be more than 2% then the entire value of the return benefit would be subject to UBIT.
Example 2:
A music teacher donates $500 to the local community theater. The teacher receives a notation in the program with her name and website listed. In addition she receives 2 season tickets to the three productions for that year. The market value of these tickets is $120. Given that the value of the tickets is more than 2% of the $500 donation, the $120 “return benefit” would be considered the value of the advertising and subject to UBIT.
Services Provided
Should a sponsor make a donation and in return require the beneficiary to provide a service, the value of that service may be considered return benefit and be subject to UBIT. Once the services are rendered, the fair market value of those services would be considered unrelated business income. It can be tricky to accurately assess the value of said services.
Example 3:
Remember the little league team from Example 1? Let’s say that same situation occurred however in addition to the banner the sporting goods store agrees to provide the entire little league team with one specialty coaching session. The fair market value of the coaching session is $500.
Because services are required as part of the sponsorship agreement, the $500 fair market value of the training received is considered unrelated business income.
Internet Issues
Although the IRS has not released specific protocol in the area of internet promotion it is important to also consider the following. Should a sponsor require a hyperlink to their website is included on the organization’s website you will need to be sure unrelated business income is not generated. Up until now hyperlinks to a sponsor’s website are not supposed to result in unrelated business income providing the tax-exempt organization is not endorsing the sponsor’s products.
Example 4:
The same little league from Example 1 includes the sporting goods store logo on its team website, along with a hyperlinked logo to the sponsor’s website. As long as the team website only includes the sponsor’s logo with a link to the website – and does not have any promotional language or endorsements no unrelated business income should be generated from the linked logo.
Recent Tax Reform
In early 2014, the House Ways and Means committee released a draft with several proposed changes to the tax code. This draft includes revisions specifically to how sponsorships are treated for UBIT purposes. Based on the proposal should an organization use the name or logo of a sponsor’s produce line, then that sponsor’s donation would be considered unrelated trade or business income.
It is expected more information will be provided regarding these potential changes in the coming year. Here at Beck & Company, Certified Public Accountants and Business Advisors, we want to help you. We are an accounting and consulting firm delivering specialized expertise, creative thinking, and unsurpassed service to ensure that our clients’ financial endeavors flourish. Ultimately we want to see your nonprofit reach its goals and we would love to help you. Contact us to learn more.