Nonprofit sponsorships are common but the correct way to provide acknowledgements for nonprofit event sponsorship is not well understood. Fundraising galas, breakfasts, golf tournaments, and similar events attract sponsors who may underwrite the event and provide a significant charitable gift.
What distinguishes sponsorships from foundation grants and individual donations are the benefits provided to the sponsor in relation to the event. For example, a charity’s annual event may offer its highest-level sponsorship for $50,000, in which the sponsor gives $50,000 in exchange for a full-page advertisement in the event program as well as ten tickets to attend the event. In such cases, the non-profit has to value the benefits being provided in exchange for the gift and inform the sponsor of the amount that is tax-deductible.
It is generally well known that a non-profit must provide a donor with a receipt for donations of $250 or more. Such written acknowledgment must include 1) The name of the donor/organization; 2) The amount of a cash donation; 3) A description (but not value) of non-cash contribution; 4) A statement that the organization provided no goods or services if that is the case; 5) A description and good faith estimate of the value of goods or services, if any, that the organization provided in return for the contribution; and 5) A statement that goods or services if any, that the organization provided in return for the contribution consisted entirely of intangible religious benefits if that was the case.
In our post, Corporate Sponsorship or Taxable Advertising?, we outline considerations in determining whether the recognition provided by sponsors is taxable income for the non-profit or tax-exempt income. We relate that “payments accepted with no expectation that the sponsor will receive a ‘substantial return benefit’ in exchange for the payment are not considered taxable advertising.” Such sponsorship payments are not taxable to the non-profit as unrelated business income. They are thus tax-deductible donations made by the sponsor, which require a written acknowledgment by the non-profit.
Whether an event advertisement is considered to provide a substantial return benefit (and thus is not a deductible donation) depends on the acknowledgment’s content. Accordingly, non-profits should execute sponsorship agreements outlining appropriate content to ensure they are not receiving taxable income and that their sponsors can deduct their donations. Ads that contain qualitative or comparative language, price information or other indication of savings or value, or an endorsement or inducement to purchase, sell, or use any company, service, facility, or product, are considered by the IRS to create substantial return benefit. Thus, the fair market value must be subtracted from the sponsorship amount in determining tax deductibility.
In other words, if a sponsor uses acknowledgment space to attempt to “sell” their company’s products/services, their sponsorship amount will not be tax-deductible; however, if the ads simply contain a company logo, general statement about the company, support for the non-profit or event honorees then sponsorship payment will be viewed as a deductible gift.
For example, suppose Martian Shuttle International, Inc. (MSI) sponsors the annual Gala of Citizens for Fair Housing for Martians at the $50,000 level, that they use the full-page acknowledgment space, and that their CEO and nine other employees use ten tickets to the event which includes a cocktail hour and full-service dinner. The MSI acknowledgment includes their logo (a space shuttle overlaying the red planet) and the caption “Martians are Awesome!” and thanks them for their support but does not include shuttle prices, an attempt to claim they have the best shuttle service, or any other sales language. This acknowledgment would not diminish the deductibility of their $50,000 donation. However, they do receive value in return for their donation based on the event’s ten tickets. If event costs (food, drink, venue, music, IT, etc.) are at $200/head, then MSI received $200 x 10 tickets = $2,000 of value in return for their $50,000 donation. Thus, Citizens for Fair Housing for Martians would have to provide MSI a written substantiation of their donation stating they received $2,000 in return benefits therefore $48,000 of their donation is tax-deductible.
Non-profit fiscal health depends upon diversification of revenue sources, and corporate/business sponsorship can be an essential part of a diversified revenue portfolio. However, from a regulatory compliance perspective, sponsorships can be more complicated than grants or donations. Thus non-profits can benefit from legal guidance in determining processes and procedures for such sponsorships.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations. Ellis is licensed to practice in Washington and Arizona and advises nonprofits on federal tax and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.