If you were to randomly poll a hundred people about the difference between a sponsorship and advertising, most would probably say they’re the same. But in the world of nonprofit accounting, the difference could end up costing—or saving—an organization thousands of dollars in taxes.
Sponsorship vs. advertising
If a business pays a nonprofit to have its logo, slogan, or other information displayed throughout the nonprofit organization’s event, that money could be considered either sponsorship or advertising. There are several qualitative factors to consider, key of which is the concept of “substantial benefit.” Did the business receive a substantial benefit for having its logo on display throughout the event? If the answer is “no,” the organization would recognize sponsorship income, which is not subject to an unrelated business income tax (UBIT). If the answer is “yes,” the organization would recognize advertising income, which is subject to UBIT.
So what qualifies as a substantial benefit? Like most tax-related questions, the IRS’s answer is, “It depends.” Some qualitative factors provide a substantial benefit, which renders the contribution of advertising-income subject to UBIT. If the message contains comparative price information, endorsements, or persuasive language to buy products, the IRS considers that a substantial benefit has been provided. On the other hand, payment to post only the business’s logo, slogan, location, and/or contact information will most likely be considered as sponsorship income not subject to UBIT.
Real world example
Consider the following hypothetical example:
If DEF is looking to maximize sponsorship income without being subject to tax, the nonprofit should seek more sponsors like KMC LLC and fewer like AMS Inc.
Know the difference
Management of a nonprofit organization should be cognizant of these nuances when it comes to planning their sponsored events. Knowing the subtle differences between sponsorships and advertising can save your nonprofit thousands of dollars in UBIT, allowing you to use those funds to support your mission and purpose.