Is Sponsorship Income Taxable?
No matter the cause, whatever the mission, all nonprofit organizations share one inescapable truth- they ALL need resources. Money, in-kind donations, volunteers, and more. Chief among these needs is money. One way or the other, even the smallest organizations are likely to need cash resources of some kind. One of the more popular avenues for raising those much-needed funds, is through sponsorship.
So, is sponsorship income taxable, or no? Short answer—>it depends.
Sponsorship is a form of marketing in which a payment is made by a company for the right to be associated with a project or program. In other words, a company—whether a large multinational corporation or the local coffee shop—provides either cash or some sort of material value (“in-kind”) in exchange for the right to identify as a sponsor of your project (most often an event of some kind) or program. Typically, this also includes value-added pieces like signage at your event, a “named” table, or logo placement on your organization’s website. There are many other visibility options and perks that you can offer, in exchange for a sponsor’s financial support, but you get the idea.
For the most part, one of the primary characteristics of a nonprofit (or more accurately, a not-for-profit) organization, is that they are not required to pay taxes on the income they earn. This exemption from paying taxes is a key offering from governments, in exchange for organizations doing the work of “serving the common good.” But beware, all income is not created equal. Although sponsorship can be an effective tool to raise money for charitable efforts, you are going to want to be familiar with its limitations. Otherwise, you could end up with unexpected expenses, or worse, in hot water with the Internal Revenue Service (IRS).
Generally speaking, the IRS makes a distinction between what it calls a “qualified sponsor payment” which is nontaxable, and “advertising” which is taxable as “unrelated business income.”
According to the IRS defines a qualified sponsorship payment as
any payment of money, transfer of property or the performance of services, by any person engaged in a trade or business, where there is no arrangement or expectation that the person will receive any substantial return benefit in exchange for the payment (Treas. Reg 1.513-4(c)(1).
while advertising is
any message or other programming material which is broadcast or otherwise transmitted, published, displayed or distributed and which promotes or markets any trade or business or any service, facility or product. Advertising includes messages containing qualitative or comparative language, price information or other indications of savings or value associated with a product or service, an endorsement or an inducement to purchase, sell or use the sponsor’s company, service, facility or product (Treas. Reg. 1.513-4(c)(2)(v).
The difference between the two, for me, is really a matter of degrees. For example, acknowledgement of a sponsor on your website, by placing their logo there (with or without a link to their website) generally passes muster for a qualified sponsor payment. However, if that link directs to a particular discount or product, then you have likely crossed over into advertising, and may be taxed for that income. Or if, instead of a general company logo, you pop a graphic describing a special or new product line that your sponsor is promoting, onto your website, you are in advertising territory. Think of these things when looking at your social media as well. A shout out acknowledging and thanking a sponsor tends to be appropriate; you can even link to the front page of their website. Endorsing that company’s products or services, on the other hand, not so much.
Do yourself and your organization a favor, and spend some time getting familiar with the IRS’ take on sponsorship and whether the funds you receive are likely to be taxable income or not. Take this into consideration when creating your sponsorship levels and opportunities, and you may save yourself a lot of grief later on.