Are Sponsorships Tax Deductible?
Disclaimer: Before you continue, you should note that neither the author nor The Sponsorship Collective are taxation or legal experts. The following is provided for general information purposes only and does not constitute legal or financial/taxation advice. You should consult a qualified tax and legal expert for all questions related to taxation and reporting income.
Most people hate it, but some look forward to that sweet, sweet refund. I’m talking, of course, about tax time. As your business grows, you may strive to add more deductibles to offset your tax payments. You had a few sponsors this past year, and you wonder if their inclusion in your business makes sponsorship tax-deductible as well. Is that the case?
If your sponsorship is not considered advertising but is a qualified sponsorship payment per IRS rules, then yes, it is likely tax-deductible. Advertising a sponsor could make your organization or company liable to pay an unrelated business income tax or UBIT. The money you raised from some events might also require you to pay UBIT.
As you can see, what counts as a tax-deductible sponsorship and what’s considered advertising in the eyes of the IRS is separated by a very thin line. It’s all a bit complex, even I’ll admit that, but you have to know for tax purposes where to classify your sponsorship. In this article, I’ll help you do exactly that.
What Is a Qualified Sponsorship Payment? Is It Tax Deductible?
Okay, so before we can get into whether your sponsorship is tax-deductible, I want to talk about what the IRS perceives sponsorship as. They outline this in IRC Section 513(i), which is about qualified sponsorship payments.
Here’s the definition: “…any payment made by any person engaged in a trade or business with respect to which there is no arrangement or expectation that such person will receive any substantial return benefit other than the use or acknowledgement of the name or logo (or product lines) of such person’s trade or business in connection with the activities of the organization that receives such payment. Such use or acknowledgement does not include advertising such person’s products or services (including messages containing qualitative or comparative language, price information, or other indications of saving or value, an endorsement, or an inducement to purchase, sell, or use such products or services).”
Whew! That was one long paragraph. Let me try to break it down a little more clearly and succinctly. Under the IRS, a qualified sponsorship payment is a payment made to a company or organization in exchange for at least signage and/or naming rights.
Further, in Section 1.513-4(b), the IRS has certain exemptions for qualified sponsorship payments that are as follows:
- “Any payment if the amount of such payment is contingent upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events,
- Any payment which entitles the payor to the use or acknowledgement of the name or logo (or product lines) of the payor’s trade or business in regularly scheduled or printed material (periodicals) published by or on behalf of the exempt organization that is not related to and primarily distributed in connection with a specific event conducted by the payee organization or,
- Any payment made in connection with any qualified convention or trade show activity. (The term ‘convention and trade show activity’ means any activity of a kind traditionally conducted at conventions, annual meetings, or trade shows.”
I know that was a lot, but now you can be sure whether your sponsorship falls under the qualified sponsorship umbrella. If it does, then yes, your sponsorship should be tax deductible.
What’s Taxable vs. What’s Not Taxable in Sponsorship
Getting a tax deduction if your sponsorship counts as a qualified sponsorship payment is great, but lots of sponsorship activities are taxable, aka a portion of your company or organization’s income would be subject to taxes. Mostly, whether sponsorship activities are taxable comes down to how promotional you are with a sponsor.
Nontaxable Sponsorship Activities
Let’s start with the good stuff, the nontaxable activities. You can add to your website the name of the sponsor, their location, their phone number, and their logo without it being taxable. That goes for your printed media as well.
You can publish one static link on your website that redirects to the sponsor’s website, but it has to be their homepage only. If it’s to a product or service page, then it’s taxable. You can also do a product or service display for the sponsor, including giving away free samples. However, if you’re perceived as endorsing the product or service in any way, the activity no longer counts as being nontaxable.
Taxable Sponsorship Activities
Far more sponsorship activities are taxable than nontaxable, so you have to watch what you do if you’re hoping for a big, juicy tax return. First of all, if your sponsorship funding is framed as a corporate sponsorship payment and what the sponsor gets in return are advertising opportunities, this could be taxable.
You’re also not allowed to write acknowledgements or advertisements about the sponsor in an email newsletter or other published materials that come out on a regular schedule, such as a company magazine.
You cannot take a corporate sponsorship payment with it being dependent on how many event attendees you’ll receive. You can’t give your sponsor preferential treatment, either. If they get a fancy reception or better tickets than what you’re selling to your audience, you’ll likely have to pay taxes.
Although I said before that you can redirect a link on your website to the sponsor’s site, remember that if it’s to a product or service page that that’s considered taxable. You can’t even put the sponsor company’s phone number for ordering a product or service on your website, nor can you endorse a product or service on your website or list the pricing for a product or service.
Exclusivity in sponsorship is usually not allowed either, as the IRS assumes that the sponsor company is going to get a “substantial return benefit.”
UBIT – What You Need to Know
If your sponsorship activities are taxable, what exactly is the tax you have to pay? It’s known as unrelated business income tax or UBIT. As the IRS says on its UBIT page, “unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.”
Outside of taxable activities, the amount of money your organization receives from some special events can also lead to you having to pay UBIT. Exclusions do apply. For instance, if you had non-paid volunteers work your event, then you could use a volunteer labor exemption and not have to pay UBIT.
How do you know if you have to pay the UBIT fee? If you have more than $1,000 in gross income from any unrelated business ventures, then you’ll have to fill out Form 990-T when filing your tax returns.
How I Recommend Handling Sponsorship Taxes
When tax time comes around, it’s always convenient to bypass the middleman and use a service that’s exclusively online such as TaxSlayer or TurboTax. You don’t have to schedule any appointments, meet with any accountants, or pay accountant fees. Yet once your taxes become more complex, which is the case if you’ve had a sponsorship, trying to do your taxes yourself becomes less advisable.
If you make a mistake on your taxes and file them before correcting the mistake, you then have to contact the IRS and send them an amended return. This now takes more time and effort, so whatever you thought you gained by filing taxes online, you lose in having to fix your mistake.
If you don’t catch the error and the IRS does, then they have to mail you a letter describing the mistake and you have until a certain deadline to fix it. If you were hoping to see your tax return before the beginning of May or even June, that won’t happen.
In some cases, the IRS can miss tax filing errors for quite a while. If you nor the IRS catch the mistake, it can eventually come back to bite you when the IRS requests a financial audit. The tax bills that you didn’t pay would be required as well as the interest that’s accrued.
In case you haven’t caught my gist, I highly recommend you see a seasoned tax professional about how to handle sponsorship as part of your taxes and financial planning.
The IRS perceives promotional activities tied to sponsorship as taxable, so the more sponsorships of those nature that you’ve had in the past year, the lower your chances of you receiving a deduction. Even if your sponsorship activities aren’t taxable, you could be charged unrelated business income taxes or UBIT depending on the nature of the events you’ve held.
I hope this information has helped shed some light on how your organization or business should handle sponsorships come tax time!
ABOUT THE AUTHOR
Chris Baylis is the President and CEO of The Sponsorship Collective and a self-confessed sponsorship geek.
After several years as a sponsor (that’s right, the one investing the money!) Chris decided to cross over to the sponsorship sales side where he has personally closed tens of millions of dollars in sponsorship deals. Chris has been on the front lines of multi-million dollar sponsorship agreements and has built and coached teams to do the same.
Chris now spends his time working with clients to value their assets and build strategies that drive sales. An accomplished speaker and international consultant, Chris has helped his clients raise millions in sponsorship dollars.