Corporate philanthropy has a natural attraction to nonprofit events. Sponsorship reduces costs and increases revenue for the organization, while it rightfully casts the company in a socially responsible light.
But be forewarned: If corporate payments cross over from sponsorship to advertising – which the IRS classifies as unrelated business income – the nonprofit may be subject to a tax on them.
The IRS defines sponsorship as a donation “substantially related to the charitable, educational, or other purpose” that’s the basis of the organization’s tax exemption. Further, sponsorship involves financial support without significant financial return. Goodwill, brand enhancement and reputation are the goals.
You can certainly recognize an event’s sponsors by listing them in your media and publications — company names and products, tag lines, logos and contact information are all permitted. And a company’s products can be displayed and even distributed at the event.
Advertising, on the other hand, takes place when your nonprofit promotes sponsors with endorsements; claims about quality, price, or value; or calls to buy their products or services.
Sometimes a company will forego sponsorship if its participation at an event stands to generate substantial profit. That’s why food and beverage companies, so prominent at outdoor arts festivals, often aren’t listed among the sponsors or partners of the event. And sometimes a company that sponsors an event will turn a profit there — and deduct its advertising-revenue tax obligation from its sponsorship contribution.
The line is not always a bright one. Every sponsorship event is unique so you need to tread carefully about how you choose to recognize your sponsors.
If you have questions about how a specific corporate sponsorship may impact your organization, please contact a member of our nonprofit team at 512.610.7200.