In recent months, nonprofits have had to make some major adjustments to their regular event schedule due to stay-at-home orders and social distancing practices. This often means opting to hold virtual galas and fundraisers in place of traditional events. The difficulty in this type of arrangement comes when determining how to maintain sponsorship opportunities – which provide a crucial income supplement for many organizations – without crossing into the realm of advertising.

In this new world of virtual galas, the line between sponsorship and advertising may become increasingly difficult to walk. However, the distinction is still a very important one because it means the difference between exempt income and taxable income. And in our current economic climate, every dollar counts.

The article below details the difference between sponsorship and advertising and why it is increasingly important for nonprofits to recognize. This article was originally publish in March of 2014 and is more critical to nonprofits now than ever before.

For nonprofits, soliciting event sponsorships from corporations (or other business entities) is a popular way to bring more dollars in the door. The nonprofit gets additional funding for their mission, and its sponsors get the recognition they deserve. Everybody wins, right?

Yes…as long as this activity doesn’t cross the line into the IRS definition of advertising. You see, while the IRS exempts qualified sponsorship payments, advertising revenue is considered unrelated business income—and is therefore taxable. Having a clear understanding of the IRS-sanctioned difference between sponsorship and advertising is critical for any nonprofit that solicits or is considering soliciting sponsorships.

Here are a few things your nonprofit should consider when soliciting sponsorships:

What qualifies as sponsorship?

Generally speaking, a payment qualifies as a sponsorship as long as the sponsor does not receive any substantial benefits in return. However, if a nonprofit actively promotes a sponsor’s products and/or services, it provides the sponsor with substantial benefits in the form of advertising, thus the sponsorship becomes taxable advertising.

The IRS sees a clear distinction between sponsor recognition and sponsor promotion. For this reason, nonprofits should be careful about how they choose to recognize their sponsors.

Per IRS rules, nonprofits can acknowledge sponsors by mentioning or displaying the following: company name, company logo, product lines and contact information (address, phone number, web address). Nonprofits are also permitted to mention slogans and value-neutral descriptions of a sponsor’s goods or services in acknowledging their support. In addition, nonprofits can display or distribute a sponsor’s products to the general public at the sponsored activity or event.

When could sponsorship be deemed as advertising?

The IRS defines advertising as any sponsor recognition or message that includes the following: qualitative or comparative language; price information or indications of saving or value; or a call to purchase, sell or use the sponsor’s products or services. (Yes, it’s a fine line to walk!) To avoid crossing this line, nonprofits should refrain from providing coupons, endorsements, or comparisons to a sponsor’s competitors at the sponsored activity or event.

Does it really matter?

While there are no rules prohibiting advertising, it could cause a nonprofit to lose a portion of their sponsorship dollars to taxes, both federal and state . And depending on the dollar amount, it could be a significant loss. So if your nonprofit is planning to generate revenue from advertising, be sure to factor in an estimate for income taxes, approximately 21% for federal plus your state’s income tax rate.

Remember, every situation is unique.

The IRS has entire publications dedicated to unrelated business income; it is a vast and complicated area. The above information is presented as general and broad. As with most things related the IRS, whether or not corporate sponsorship income is deemed to be advertising revenue depends on specific facts and circumstances.

So while event sponsorships can be a great way to bring in additional revenue, it’s important to understand the difference between sponsorship and advertising. Doing so can help you plan ahead, properly report revenue to the IRS, and keep sponsorship dollars intact.

How the IRS tried to chip away a lucrative Tostitos sponsorship.

When the NCAA brought Tostitos on as the title sponsor of the Fiesta Bowl, they changed the bowl game’s name to the Tostitos Bowl. The IRS later threw a penalty flag and took the NCAA to court, arguing the money garnered from Tostitos (and all bowl sponsors) was advertising revenue—and therefore taxable.

But the court disagreed. They ruled that the amount Tostitos paid the NCAA to have their name and logo front-and-center was sponsorship revenue, not advertising.

So why did the NCAA win big in court? They did nothing to promote Tostitos products and, according to the court, followed all applicable IRS rules.

Steve Anseth, CPA, is a Partner and leads the Abdo Eick & Meyers nonprofit practice area. Whether he’s helping a client reach their goals or competing in an inline marathon, Steve is always thinking ahead.

You can reach Steve at 952.715.3029 or at steven.anseth@aemcpas.com.

Session 2    |    Tuesday, June 24th    |    10:00 AM – 12:00 PM

Designed to help you navigate the twists and turns of complex financial issues that you face as a nonprofit, join us for our 2020 Nonprofit Financial Success Series. Find knowledge and insight in our complimentary sessions where we will cover relevant topics to help your nonprofit begin to gain traction once again in the “new normal”.

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