Charitable giving by individuals in the United States decreased by 1.1% in 2018 when compared to 2017, according to research from Giving USA. One cause for this decrease was due to changes to the tax law under the Tax Cuts and Jobs Act. To compound the decreases in contributions that not-for-profits are facing, corporate giving is trending similarly. Corporate sponsors are increasingly interested in knowing the outcomes that their contributions support and looking for more value-added benefits.
The combination of not-for-profit organizations and corporate sponsors can benefit both sides
Not-for-profits receive a variety of benefits from partnering with business for corporate sponsorships.
Some of these benefits might include:
Likewise, corporate sponsors also receive a number of benefits, including:
What is a qualified sponsorship payment for a not-for-profit organization?
It is important to distinguish whether the sponsorship meets the IRS definition of a qualified sponsorship payment, otherwise, the sponsorship could become a tax liability, even for a not-for-profit. Not-for-profit exempt organizations are taxed on income from any unrelated trade or business activities regularly carried on by the organization, net of any allowable deductions.
The IRS defines a qualified sponsorship payment in the Internal Revenue Code, Section 513(i) as:
“… any payment made by any person engaged in a trade or business with respect to which there is no arrangement or expectation that such person will receive any substantial return benefit other than the use or acknowledgment of the name or logo of such person’s trade or business in connection with the activities of the organization that received such payment.”
More simply, a qualified sponsorship payment is when a not-for-profit receives support to further their organization with no expectation that the sponsor will receive a substantial return benefit for providing the payment.
Structuring a qualified sponsorship agreement to meet the contribution requirements
Recognition of a qualified sponsorship payment by a not-for-profit follows the same process used for general contributions being received; however, it is important to ensure that the benefits provided to the corporate sponsor do not overshadow the benefits being received by the not-for-profit. Here are a few indicators that a sponsorship is a charitable contribution:
Not-for-profit’s website includes a link to the sponsor’s homepage only – the link cannot direct a viewer to a page where the sponsor’s products or services are advertised or sold.
Not-for-profits can have an unbiased display of the sponsor’s products or services, or even handout free samples provided by the sponsor at events held by the not-for-profit, but the not-for-profit should not endorse the sponsor.
Which activities in a sponsorship agreement can result in a tax liability for a not-for-profit?
Depending on how the sponsorship is designed, the IRS may determine that the sponsorship provides a substantial return benefit to the sponsor, thus resulting in the sponsorship being recharacterized as taxable unrelated business income for advertising (UBI).
The first step is to determine whether there are any differences between what the corporate sponsor receives and what general donors receive. If there are variances identified, the sponsorship may be related to UBI for advertising. Advertising, with respect to sponsorships, is defined as providing qualitative or comparative information, price details, indications of savings or value, endorsements, or an inducement to purchase the sponsor’s goods or services. Some questions to help determine whether the sponsorship should be characterized as advertising revenue for the not-for-profit include:
Is the sponsorship payment conditional to reaching a certain number of attendees at the not-for-profit’s event?
Has the not-for-profit openly endorsed the sponsor’s products or services?
Does the not-for-profit’s website include a link to the sponsor’s website that directs viewers to a sales/order page, or detail the information for how to order the sponsor’s products or services?
Has the not-for-profit provided the sponsor with facilities, services, or other privileges to the sponsor in return for the sponsorship (e.g. sporting event tickets, exclusive meetings or narratives not available to the general public, or extravagant receptions)?
If the answer is yes to any of these questions, then the sponsorship would be characterized as advertising revenue for the not-for-profit instead of a qualified sponsorship payment. Therefore, it would expose the not-for-profit to potential tax liabilities from UBI.
Is there a difference for how sponsorship revenue and advertising revenue are recognized by the not-for-profit under the new revenue recognition standards?
Since qualified sponsorship payments are considered to be contributions, not-for-profits should follow FASB 958-605, Not-for-Profit Entities – Revenue Recognition – Contributions. Therefore, a qualified sponsorship made and acknowledgment of the sponsorship payment received generally are recognized by both the not-for-profit and the sponsor at the same time, or if conditional, when the condition(s) have been met. A qualified sponsorship payment can be both a transfer of cash or other assets to an entity and a reduction, settlement, or cancellation of its liabilities. Contributions, including sponsorships, require written acknowledgments to the donor and written sponsorship agreements are considered best practices.
Advertising revenue is considered to be an exchange transaction, as payment is received in exchange for provision of an economic benefit to the sponsor.
As a result, not-for-profits should follow FASB 606, Revenue from Contracts with Customers. The not-for-profit should recognize revenue only as they satisfy the performance obligation(s) agreed to with the sponsor, which would include transferring a promised good or service (i.e. advertisement or promotion) to the sponsor. Advertising in a magazine would be recognized when the magazine has been published.
Can a sponsorship payment have elements of both a charitable contribution and advertising?
Yes, and if so, it is the responsibility of the not-for-profit to bifurcate the portion of the sponsorship payment that is considered to be unrelated business income for advertising, and inform the sponsor of the portion considered to be a charitable contribution and the portion considered to be an exchange transaction. Revenue should be recognized in accordance with the FASB guidance described above in proportion to the bifurcation of the sponsorship. What can a not-for-profit do to limit their exposure with unrelated business income from advertising?
Not-for-profits should review their sponsorship agreements and modify them to ensure the terms specify the exact form of acknowledgment, return benefits, and the value of any taxable benefits that the sponsor will receive for their sponsorship payment. In addition, not-for-profits should also include in the sponsorship agreement that they reserve the right to approve any reproduction of materials with reference to the sponsorship, the sponsor’s use of the not-for-profit’s name/logo, and the web address for which hyperlinks will direct viewers.
Thus, having corporations and not-for-profit teams together is a winning combination for both sides to achieve the mission of the not-for-profit.