Tax Law Blog
Tax-exempt 501(c)(3) charitable organizations can raise money by asking businesses to "sponsor" an event or initiative. These sponsorships can provide much needed revenue to the charity and can help to support an event that allows the charity to raise even more money.
The business that sponsors the event or initiative benefits from the public recognition and from the deduction that it receives for the sponsorship amount, either as a charitable contribution under Internal Revenue Code ("IRC") Section 170 or as an advertising expense under IRC Section 162.
Although the sponsoring business should receive a deduction regardless of the section of the IRC under which the expense falls, the charity may have unrelated business income (“UBI”) if the sponsorship is considered "advertising," rather than a charitable contribution. Unrelated business income may expose the charity to tax liability and place the charity’s tax exemption at risk.
So how does a charity avoid UBI tax liability from corporate sponsorships? One way is to fall under a safe harbor provision in the tax code called a "qualified sponsorship payment." A qualified sponsorship payment is a payment made by a business where there is no expectation of a substantial return benefit, other than the use or acknowledgement of the name or logo of the trade or business. Contrast this to taxable advertising, which goes further by communicating qualitative or comparative language, price information, endorsements, or an inducement to buy or sell any product or service. The communication may occur on the charity’s website, for instance, or via links on the charity’s website to the sponsoring business’s website.
The rules in this area are nuanced. We recommend that charities consider retaining an attorney who specializes in tax-exempt law to review sponsorship programs prior to accepting any sponsorship payments.
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