Corporate sponsorships represents a significant funding source for tax exempt organizations and an important business strategy for taxable organizations. Sponsorships creates identification with charitable activity. This type of identification is valuable to those organizations.
Sponsorship payments received by tax-exempt organizations has been an issue that the IRS has struggled with, first focusing the nature of the services provided by the exempt organization rather than the benefit received by the sponsor, and distinguishing advertising (which is an unrelated trade or business activity) from acknowledgements (which are not UBTI). Then section 513(i) was added to the law, which defines qualified sponsorship payments and provides that they are not subject to unrelated business income tax.
What are Qualified Sponsorship Payments?
Treas. Reg 1.513-4(c)(i) defines a qualified sponsorship payments 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.
What are NOT Qualified Sponsorship Payments?
Treas. Reg 1.513-4(b) states that a qualified sponsorship payment does not include:
- 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 and 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.)
- Any payment which entitles the payor to acknowledgement 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. These are considered advertising. A single message that contains both advertising and acknowledgement is considered advertising.
What is Substantial Return Benefit?
Treas. Reg 1.513-4(c)(2) provides that if there is an arrangement or expectation that the payor will receive a substantial return benefit with respect to any payment, then only the portion of the payment that
exceeds the fair market value of the substantial return benefit is a qualified sponsorship payment. However, if the exempt organization does not establish that the payment exceeds the fair market value of any substantial return benefits, the no portion of the payment constitutes a qualified sponsorship payment.
More information on Qualified Sponsorship Payments can be found at https://www.irs.gov/charities-non-profits/advertising-orqualified-sponsorship-payments.
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