Corporate Sponsorship of a Nonprofit Organization
By Jeremy Chen
Generally, a nonprofit organization must pay unrelated business income tax (“UBIT”) on any unrelated business income generated from its business activities. Corporate sponsorship, also known as a “qualified sponsorship payment”, is an exception to UBIT that allows a nonprofit to receive untaxed payments from a for-profit company sponsor, as long as there is no arrangement or expectation of a “substantial return benefit” to the sponsor.
Substantial Return Benefit
A “substantial return benefit” is any benefit received by a sponsor in return for their sponsorship payment, other than (1) use or acknowledgment of the sponsor’s name, logo, or product lines by the nonprofit, or (2) any goods or services of “insubstantial value” provided by the nonprofit to the sponsor.¹
1. Use or Acknowledgment
The IRS does not consider use or acknowledgment of a sponsor’s name, logos, or product lines to be substantial return benefits. In addition, the IRS allows nonprofits to acknowledge:
- A sponsor’s logos and slogans (as long as they do not include qualitative or comparative descriptions of the sponsor’s products, services, facilities, or company),
- Value-neutral descriptions of the sponsor’s product lines or services (including displays or visual depictions), and
- A list of the sponsor’s location addresses, phone numbers, or URLs.
In contrast, advertising is considered a substantial return benefit, and is normally considered unrelated business income. The main distinction between “use or acknowledgment” and advertising is that advertising contains any message that promotes a sponsor’s products or services to potential customers. More specifically, advertising includes:
- Messages containing qualitative or comparative language, price information, or other indications of savings or value,
- Endorsements, and
- Inducements to buy, sell, or use products or services.
Links to a sponsor’s website on a nonprofit’s website can be considered advertising instead of use or acknowledgment in certain circumstances. For example, a link on the nonprofit’s website to the sponsor’s website is considered use or acknowledgment. On the other hand, a link to a sponsor’s website that contains an endorsement from the nonprofit is considered advertising.
Nonprofits and corporate sponsors should take care not to include messages that promote or market a sponsor’s products, services, or company to avoid inadvertently having an acknowledgment be considered advertising.
2. Benefits of “Insubstantial Value”
A nonprofit can give a sponsor benefits of “insubstantial value” without paying UBIT on any part of the sponsor’s entire payment as long as the benefits have a fair market value of 2% or less of the sponsorship payment. Benefits that exceeds the 2% limit in value are not considered insubstantial and are subject to UBIT. If a corporate sponsorship arrangement provides for both a sponsorship payment and return benefits, then the amount of the payment that exceeds the value of the return benefits will be allocated and treated as untaxed sponsorship funds. Furthermore, the burden is on the nonprofit, not the sponsor, to prove the fair market value of the benefits provided.
Return benefits can take the form of advertising; goods, facilities, services, or other privileges; exclusive or nonexclusive rights to use the nonprofit’s trademark or logo; or exclusive provider arrangements. An “exclusive provider” arrangement, where a nonprofit agrees to allow only one sponsor’s products or services to be sold or distributed in connection with a sponsored activity, is considered a return benefit.³ In contrast, an “exclusive sponsorship” arrangement, where a nonprofit agrees to have only one sponsor and that sponsor is acknowledged as such, is considered to be an allowable acknowledgment and not a return benefit.
Corporate Sponsorship Agreements
Corporate sponsorship agreements can vary in depth and formality depending on the nature of the sponsorship and the relationship of the two organization. It is recommended that a corporate sponsorship agreement include provisions that address the following:
- Form of Acknowledgment – The form of sponsor acknowledgment (or other displays of logos, trademarks, names, or product lines) should be specifically identified to avoid any inadvertent advertising from being attributed to the nonprofit.
- Return Benefits – Identify the specific return benefits given by the nonprofit to the sponsor, if any.
- Value of Return Benefits – State the fair market value of any return benefits given to the sponsor.
- Review and Approval Rights – Both the sponsor and nonprofit should retain review and approval rights over uses of their respective logos, trademarks, and names. A sponsor will want to review all uses or acknowledgments to ensure that the company is portrayed in an accurate and neutral light. Likewise, a nonprofit should review the sponsor’s promotional and marketing materials to avoid inadvertent attribution of its name or trademarks as an endorsement of the sponsor’s products or services.
- Links – Linked acknowledgments from the nonprofit’s website to the sponsor’s website should identify the specific pages on the sponsor’s website which will be linked, and require that those pages be free of endorsements from the nonprofit.
- Termination – The agreement should include the conditions for termination of the corporate sponsorship, such as when and under what circumstances the sponsorship will end.
¹ This exception is a safe harbor provision codified as §513 of the Internal Revenue Code and implemented by a set of final regulations issued by the IRS. If the corporate sponsorship exception does not apply, a payment from a for-profit company to a nonprofit may qualify for a different exception to the UBIT.
² If the 2% limit is exceeded, that fair market value of that return benefit may be subject to another exclusion to UBIT.
³ It should be noted that not all exclusive provider arrangements are subject to UBIT because the amount of activity may not be frequent enough to qualify as “regularly carried on” or may not require sufficient obligation from the nonprofit to be considered a trade or business.
Disclaimer. The information in this article is not legal advice, and is provided only for informational purposes. This article is only a general discussion, and does not include all relevant information regarding the topics and issues addressed within it.
IRS Circular 230 Notice. To ensure compliance with requirements imposed by the IRS, this law practice informs you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter(s) addressed herein.
201 Spear Street, Suite 1100, San Francisco, CA 94105 / +1 415 857 3801 / email@example.com