[Updated 2025] Many nonprofits want to get money from businesses that sponsor them. But it’s not always clear what counts as a real sponsorship and what counts as taxable advertising. This mix-up could cause problems with the IRS, tax-exempt status, and even rules for public charities.
Here’s something important to know: If your nonprofit does too much advertising for a sponsor, the money they give you may be taxed as unrelated business income. That means you might have to do more paperwork and lose some tax breaks.
Using IRS rules and real-life examples, this post explains how to tell the difference between taxable advertising and corporate sponsorship. You will learn what activities are safe, what activities cause taxes, and how to keep your nonprofit from making expensive mistakes.
Important Points
To keep corporate sponsorship payments tax-free, nonprofits have to follow IRS rules. If sponsors only get a simple thank-you, like a name or logo at events or on websites (no praise or sales talk), then payments are safe.
If a sponsor gets more than just recognition, like ads with prices, special deals, endorsements, or calls to buy things, the payment is considered taxable advertising and triggers unrelated business income tax (UBIT).
The IRS says that anything given in return must be “insubstantial,” which means it must be worth less than 2% of the fair market value of the sponsor’s total payment. Giving more can hurt your nonprofit’s finances and put its public charity status at risk.
It’s okay to include sponsor logos, names, addresses, website links (without sales pitches), and neutral slogans like “Sponsored by ABC Cookies.” Don’t use words that compare (“best”), price information (“10% off”), exclusive selling rights at events, active links for buying things, or direct marketing language.
Nonprofits can prove they meet IRS standards by keeping good records. When the law changes or a case is hard, getting legal advice from experts like Ellis Carter can help you avoid making expensive mistakes when raising money.
How to Tell the Difference Between Corporate Sponsorship and Taxable Advertising
When it comes to taxes, sponsorship and advertising are very different for nonprofits like charities and 501(c)(3) groups. The IRS wants to know if the payment is a qualified sponsorship or unrelated business taxable income. This means that sponsors and nonprofits need to keep these lines clear.
Understanding Corporate Sponsorship
A business usually gives money to a nonprofit organization as part of a corporate sponsorship. The sponsor only gets credit in return. This could mean that the company’s name or logo is shown at an event or on materials for a charity.
The Internal Revenue Code says that most tax-exempt groups don’t have to pay taxes on these payments as long as the sponsor doesn’t get a big return benefit.
Unrelated business income tax (UBIT) does not apply to qualified sponsorship payments. For instance, if a non-profit puts a sponsor’s logo or product line on its website without trying to sell anything, the IRS says this is non-taxable acknowledgement.
If you want to stay tax-free, make sure that any recognition is simple and doesn’t turn into real advertising.
The main benefit of corporate sponsorships is that people will see the sponsor’s name, logo, or products. That’s all.
Tax Implications for Corporate Sponsorship
If the IRS sees corporate sponsorship payments as taxable advertising, they may be taxed as unrelated business income. If a sponsor’s payment buys more than just a simple thank-you, like ads with price details or calls to action, it triggers unrelated business income tax, or UBIT.
Nonprofits could lose their public charity status because the IRS does not count UBI as public support. Nonprofits need to follow strict IRS rules to avoid making expensive mistakes.
To avoid paying taxes on corporate sponsorship payments, charities need clear agreements and safe harbor practices. Acceptable recognition can include the names of sponsors or simple slogans, but it can’t use comparative language or encourage people to buy goods and services.
IRS rules say that nonprofits must follow the rules when it comes to recognising sponsors without crossing the line into advertising. This includes printed materials and website displays. Under the current tax code, even small mistakes in sponsorship agreements can cause non-profit groups to have to pay federal income taxes.
Recognizing Non-Taxable Acknowledgment
A sponsor’s name, logo, or slogan is an example of non-taxable acknowledgement. Nonprofits can also give out the sponsor’s phone number, website, or address without having to pay taxes on it.
It’s okay to say a sponsor’s business name or services in simple terms, like “sponsored by ABC Cookies.” Nonprofits must follow IRS rules, which means they can’t use endorsements or promotional language.
If you add product reviews, tell people to buy from the business, or give price information, it becomes taxable advertising instead of an acknowledgement. If acknowledgements are neutral and factual, qualified sponsorship payment rules keep nonprofits from losing their tax-exempt status.
For example, saying “Thank you to XYZ Bank for supporting our event” does not count as advertising income under the unrelated business income tax (UBIT) laws.
Guidelines for Qualified Sponsorship Payments
The IRS has clear rules about what makes a sponsorship payment tax-exempt for groups. Nonprofits need to be careful about these rules to avoid problems with unrelated business income tax, especially when they work with corporate sponsors or write sponsorship agreements.
Criteria for No Substantial Return Benefits
If sponsors don’t get a lot of benefits in return, payments to a nonprofit count as qualified sponsorship. These rules help non-profits stay tax-exempt and stay out of trouble with the unrelated business income tax (UBIT).
- Corporate sponsorship can’t give the sponsor goods or services worth more than a small amount, which means less than 2% of the payment’s fair market value.
- If a sponsor gets products, tickets, or other benefits worth more than 2% of the total payment, only the part that is less than that amount is considered qualified sponsorship and is not subject to UBIT.
- Payments shouldn’t depend on how many people go to an event or how much public exposure a sponsor gets. This keeps payments from being taxed as advertising income.
- It’s okay to show appreciation by saying thank you, showing logos, listing business names, or using slogans, as long as these things are just for identification. They won’t make it taxable.
- Nonprofits should not give sponsors exclusive rights to sell things at events because this could raise questions about the value of the return and could make the advertising taxable under IRS rules.
- If you use comparative language like “best” or give price information about the sponsor, it becomes taxable advertising. Just say “thank you” and leave it at that.
- Tax-exempt 501(c)(3) groups and commercial fundraisers should make it clear in their sponsorship agreements that the only benefit they get is simple recognition.
Strict compliance is important for both big fundraising events and small charity events in the area. Nonprofits can avoid unrelated business income and stay within state registration requirements for charitable contributions by following these rules.
Proper Acknowledgment Practices
If a nonprofit properly acknowledges a corporate sponsor, the money won’t be taxed. The IRS has clear rules about how organizations must thank their sponsors.
- Use the sponsor’s name, logo, or products only to help people find them. Don’t use words that praise or compare.
- In sponsorship acknowledgement, nonprofits can include contact information that doesn’t show any bias, such as an address, phone number, and website.
- It’s okay to use slogans as long as they aren’t ads. “Just do it” would work as long as it doesn’t make people want to buy.
- Say in a neutral way how the sponsor is connected to the event or program. For instance, “Acme Corp. is sponsoring this.”
- Don’t tell people to buy, use, or recommend the sponsor’s goods or services.
- When done without promotional text, listing multiple sponsor details on websites counts as acknowledgement.
- If only basic information about the sponsor is shared, there is no need for a fair market value test.
- Acknowledgement messages should not include any information about prices, discounts, sales language, or comparisons.
- Nonprofits can protect their tax-exempt status from unrelated business income tax (UBIT) risks by following the right steps.
- Following these rules meets the requirements for state registration and helps nonprofits follow the rules for raising money
Safe Harbor Exclusions
According to IRS rules, some sponsor payments may not be eligible for the safe harbor rule. Tax-exempt organizations may have to pay unrelated business income tax (UBIT) on these payments.
- The safe harbor doesn’t cover payments based on how many people attend an event, how many people watch a broadcast, or how many people see a charity’s message.
- If a nonprofit agrees to limit competitors in exchange for money from sponsors, this payment is seen as a substantial return benefit and becomes taxable advertising income.
- If an acknowledgement includes promotional or comparative language about the products of a sponsor, it is no longer protected by safe harbor.
- If you include the prices of goods or services from sponsors in your acknowledgement, it can cause tax problems. For nonprofits, this means ubit.
- Adding calls to action like “Buy Now” or product endorsements makes the sponsorship payment count as unrelated business income.
- If the nonprofit only promotes one brand through exclusive provider arrangements, it has to report the payment as taxable advertising instead of a qualified sponsorship payment.
- Nonprofits that work with commercial fundraisers need to read their sponsorship agreements very carefully so they don’t accidentally make money from advertising that is taxable.
- If you do things that break these rules, like using links that take donors directly to a corporate homepage with sales pitches, those payments will no longer be safe harbor and will be subject to UBIT charges according to IRS rules.
Analyzing Substantial Return Benefits
This section explains what a “substantial return benefit” is, gives examples from IRS rules, and explains why it’s important to know fair market value. It also explains how these rules affect nonprofits and their sponsors.
Clarifying Definitions and Exceptions
Substantial return benefits are goods or services that a sponsor gets from a nonprofit, but only if the fair market value of those goods or services is 2% or more of the sponsorship payment. According to IRS rules, if a charity only lists the name, logo, or products of a sponsor at an event or on its website, that is not taxable.
If the payment goes above the 2% threshold and gets a significant return, it is no longer safe harbor and could be subject to unrelated business income tax (UBIT).
The IRS says that there is a difference between just recognising sponsors and actually promoting them. For instance, using words like “the best” or giving price information changes the status of tax-exempt organizations from corporate sponsorship to taxable advertising income.
These rules help nonprofits keep their tax-exempt status while carefully handling sponsorship agreements.
Assessing Fair Market Value
Nonprofits have to set and keep track of the fair market value of any goods or services they give to sponsors. The IRS says that if the benefits given are more than 2% of the total sponsorship payment, only the part that is 2% or less is a qualified sponsorship payment.
The rest is unrelated business income and may be taxed according to the rules for unrelated business income tax (UBIT). For instance, if a business pays $10,000 for an event, they can give away benefits worth up to $200 without having to pay extra taxes.
Anything above that amount is taxed on the extra amount.
To get a good idea of what the fair market value is, it helps to look at other similar transactions in your area. Keeping good records is very important. Write down every estimate and calculation you use in case the state or the IRS comes to check them.
Next, we need to look at what counts as exclusive sponsorship rights and how they change the rules for taxable advertising.
Exploring Exclusive Sponsorship Rights
For tax purposes, exclusive sponsorship rights usually don’t count as a big return benefit. For instance, if a nonprofit group only lets one company be their exclusive sponsor, this is called an exclusive acknowledgement and does not count as unrelated business income tax (UBIT).
This kind of arrangement is okay with the IRS because of corporate sponsorship rules.
Exclusive provider agreements make a big difference. When a charity says that only one business can sell or promote its goods at an event or as part of its programs, it limits competition and triggers UBIT.
This type of deal is considered taxable advertising income. To follow fundraising rules and keep their tax-exempt status, charities need to pay close attention to these details in all of their sponsorship agreements.
Exploring the Qualified Sponsorship Safe Harbor
Safe harbor rules keep nonprofit groups from having to pay unrelated business income tax on sponsorships. By following these IRS rules, you can protect your charity’s tax-exempt status and give sponsors credit instead of advertising income.
Examples of Acceptable Acknowledgements
- Nonprofit organizations can follow clear rules to thank a corporate sponsor without getting into trouble with tax laws about advertising. Following these rules will help you keep your tax-exempt status safe.
- The official logo of the sponsor is the only one that appears on event banners, flyers, and email newsletters from a nonprofit organization. There is no extra advertising language.
- The nonprofit’s website has the sponsor’s business name, phone number, and website address as a way to say thank you for their help.
- Printed programs for charity events talk about the sponsor’s business or product line in a neutral way, like “ABC Bank – Full service banking since 1950.”
- If the sponsor’s slogan is a trademarked phrase, it will be in the nonprofit’s newsletter. It won’t include any calls to action or urges, like “XYZ Clothing: Comfort You Can Trust.”
- Pages that thank sponsors include factual information about the business, such as physical addresses or contact information, but not prices.
- Under safe harbor rules, signs at fundraising events can say “Thank you to our exclusive sponsor” as long as they don’t encourage people to buy things.
- During an awards ceremony, an organization thanks its sponsors by showing their names and trade names. This is in line with IRS rules for qualified sponsorship payments.
- Sponsor lists on digital platforms only use neutral language to describe each supporter. For example, “Proud partner – Jones Construction.”
- Event booklets show sponsors’ logos next to those of other supporters, but they don’t brag about how their goods or services are better than those of their competitors.
Incorporating Sponsor Logos and Slogans
A nonprofit can include sponsor logos in their sponsorship acknowledgement as long as the logo doesn’t have any praise, comparison, or promotional language. A sponsor’s slogan is also fine, but it can only reflect the company’s identity and not push sales or say “best” or “cheapest.” For tax-exempt organizations, showing a sponsor’s name with their own branding on banners or websites is safe.
The main thing is to avoid crossing into taxable advertising. If you add price information, calls to action like “buy now,” or any claims about quality, your sponsorship acknowledgement will become unrelated business income that is subject to UBIT (unrelated business income tax).
Nonprofit compliance means using only the simple logo and plain slogans—no words that suggest support or encourage people to buy the sponsor’s goods. This practice helps nonprofits stay out of trouble with the IRS when it comes to qualified sponsorship payments and keeps their tax-exempt status under federal fundraising rules.
Featuring Sponsors on Nonprofit Websites
Nonprofits can show corporate sponsorships on their websites, but they have to follow IRS rules to avoid unrelated business income tax (UBIT). The safe harbor rules let them list the names, logos, physical addresses, and contact information of their sponsors.
Using value-neutral information makes the display a sponsorship acknowledgement instead of taxable advertising income.
Sponsorship content can’t use sales language or give prices. UBIT is also triggered by direct calls to action like “buy now” or comparisons between products.
For instance, saying “Ellis Carter Law Firm – leading in Arizona consulting” would not be a proper acknowledgement according to IRS rules. Nonprofits should only include basic information about their sponsors to stay in compliance and keep their tax-exempt status.
Understanding Taxable Advertising
Taxable advertising has special rules for nonprofits, especially when it comes to IRS rules on unrelated business income tax. Knowing what makes a sponsor’s support turn into advertising income helps keep your group’s tax-exempt status and makes compliance easier to understand.
Defining Characteristics of Taxable Advertising
If it uses qualitative or comparative language, like calling a product “the best” or “number one,” it is taxable advertising. For tax-exempt organizations, sharing price information, giving details on savings, or showing value also changes safe corporate sponsorship into unrelated business income.
An ad that tells people to buy, sell, or use the sponsor’s goods is also one. The IRS cares about these differences when it comes to rules for nonprofits and fundraising.
Sponsorship acknowledgement can only include the sponsor’s name, logo, or general praise without trying to sell anything. Endorsements turn a nonprofit’s acknowledgement into taxable advertising income.
For example, saying “Try Company X’s products—they’re amazing” is crossing the line. Using call-to-action phrases or promoting discounts can cause problems with nonprofit compliance and could lead to unrelated business income tax (UBIT).
Nonprofits need to carefully read sponsorship agreements so they don’t lose their tax-exempt status because they have hidden commercial fundraisers in their marketing materials.
Illustrating Examples of Taxable Advertising
Taxable advertising is when a nonprofit charges a company to promote it or its goods. For tax-exempt groups, these actions can lead to unrelated business income tax, or UBIT.
- A local charity holds an event and puts up a sponsor’s banner with phrases like “Best Value in Town” or “Number One Savings.” The banner uses comparative language to promote the business, which makes this taxable advertising income because it goes beyond just saying thank you for sponsoring.
- An ad in a nonprofit newsletter says, “Visit ABC Electronics for 10% off your next purchase.” This kind of price information and incentive is considered advertising. The money received is considered unrelated business income by the IRS.
- A hospital foundation sends out flyers with descriptions of medical devices made by their sponsor, including technical details and calls to action like “Ask your doctor today.” Since this promotes specific products and encourages people to buy them, UBIT applies.
- The group offers live mentions like “Try the new spicy chicken sandwich at Bob’s Grill. Now serving at two locations!” during a fundraising gala. These are endorsements and count as commercial fundraisers’ activity, not just acknowledgements. The IRS would see this as taxable advertising.
- A museum’s website links to its sponsor and encourages people to shop there by saying things like, “Click here to shop Old City Books—get your exclusive member discount now!” This kind of direct marketing on digital platforms is considered taxable advertising income under UBIT rules.
- A nonprofit for the arts uses radio ads to promote its sponsors with slogans like “Make every day better with Brewster Coffee.” But using media channels to promote sponsors is not considered qualified sponsorship under fundraising rules.
- Runners get t-shirts with full ads from real estate companies that include phone numbers and special offers. These payments don’t fit safe harbor exclusions because they go beyond just saying thank you.
Each example shows how moving from recognition to promotion can make taxable advertising income for non-profits. Following IRS rules helps protect tax-exempt status and encourages openness between non-profits and their sponsors.
In conclusion
To stay compliant and tax-exempt, nonprofits need to know the difference between corporate sponsorship and advertising. Clear rules, like the IRS safe harbor, make it easy to tell what counts as a qualified sponsorship payment or taxable promotion.
Using the names or logos of sponsors without talking about sales keeps most donations tax-free and helps with good fundraising. Keeping an eye on fair market value and big return benefits protects your group from having to deal with unrelated business income tax problems.
For more information or help with IRS rules, look at reliable sources or talk to a lawyer. Small changes can make a big difference in how you manage your charity’s money.
Questions and Answers
1. What is the difference between taxable advertising and corporate sponsorship for nonprofits?
Corporate sponsorship gives money or resources to a charity without expecting much in return. Taxable advertising, on the other hand, means that the business gets a big return benefit, like ads or promotions. The IRS may see this as unrelated business income.
If a nonprofit gets money from taxable advertising instead of qualified sponsorship payments, it may have to pay UBIT. If this isn’t done correctly, it could lose its tax-exempt status.
3. What does the IRS say is a valid sponsorship payment?
A qualified sponsorship payment is when a business pays for simple recognition only. There can’t be any price information or language that compares things. If the message looks like an ad with calls to action, it isn’t safe harbor and could be taxed.
4. What does ‘fair market value’ mean in these agreements?
Fair market value helps nonprofits figure out if what they give sponsors back is too much. If the return benefit is big enough, the money is taxed differently and must be reported differently.
5. Do you need to register with the state if you want to raise money with commercial fundraisers?
Yes, many states require nonprofits and their commercial fundraisers to register before they can work together to raise money. Nonprofit compliance rules can be different in different places, so always check the laws in your area.
6. What effect do indemnification clauses and copyrights have on corporate sponsorships?
Indemnification clauses keep both sides out of trouble with the law during events or marketing campaigns related to the deal. Copyrights show who owns content made through these partnerships, and clear terms help keep things from getting messy later on.
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.