Compliance Corner: Ensure Your Corporate Partnerships Are Tax Compliant

Are Your Corporate Partnerships Tax Compliant? 

Relationships between nonprofits and companies can be impactful and mutually beneficial—especially co-branded relationships. 

But, before you enter into a relationship with a company, it’s important to know the IRS’s rules around what is taxable and not taxable in such relationships.

Simply put, The IRS determined that sponsorships and agreements with the nonprofits could cause an excess benefit to the corporate sponsor and that’s not allowed without tax consequences.

The IRS has a special classification of income for nonprofits called Unrelated Business Income (UBI). UBI is different from any other type of income because it is taxable. The IRS has determined that advertising income is UBI, so you have to be careful when defining the terms of your corporate partnership. 

Basically, UBI is income that comes from selling goods or services that aren’t related to a nonprofit’s mission over a prolonged period. 

Why Is Advertising Income Considered UBI?

Well, there are for-profit advertising companies whose entire purpose is to buy and sell ads (think Omnicom Group, Publicis, and even Facebook). So, if your nonprofit is selling advertising to companies (which doesn’t have much to do with your mission), it will be taxed like a for-profit. Agreements with corporate sponsors become considered advertising when:

1. Prices or information on savings on products is provided or the nonprofit endorses or induces people to use the corporation products or services;
2. There is an active placard or running banner indicating where to buy products or services of the corporation on the nonprofit website;
3. There is a website link to the sponsoring corporation’s product sales page on the nonprofit’s website
4. The corporation gets access to events, services, or other privileges like complimentary sports or theater tickets, lavish receptions, or extra golf expense benefits;
5. The nonprofit provides goods or services of more than 2% of the total market value of a ticket/product/service or $74 (whichever is greater) of the total sponsorship payment (ie, if the fair market value of a ticket is $75 or more, the entire $75 or more may be taxable);
6. The nonprofit accepts a corporate sponsorship payments based on the level of attendance at an event, broadcast rating, or level of advertising exposure;
7. The nonprofit provides a corporate sponsor with advertising in a nonprofit’s regularly scheduled newsletter or other published material;
8. The sponsorship is exclusive sponsorship where the sponsor is the only company with the products to be sold.

Avoid Unnecessary Taxes with Acknowledgement

Nonprofits are not required to pay taxes on corporate sponsors they acknowledge but do not advertise for. Basically, “The IRS focuses on whether a corporation has any arrangement or expectation that such sponsor will receive any substantial return benefit….”

Acknowledgment (activities you can perform without being taxed) includes: 

1. Acknowledgment of the corporate sponsor’s name, logo, slogans, brand/trade name, general phone number, locations, and home page internet address.
2. “Value-Neutral” displays (without pricing) of a sponsor’s products or services and free samples of their products at a nonprofit event.
3. An internet link to the homepage of the corporate sponsor, but not to where they sell their products and services. 
4. Right to be the only sponsor of an activity or representing a particular trade as long as they are not selling or promoting the selling of products or services.
5. Giving products or services to the corporation that are insubstantial in nature, which is defined as less than $74 or having a fair market value of no more than 2% of the total sponsorship payment.

A couple of other quick tips:

1. Don’t combine advertising with acknowledgment. If you are going to advertise, understand that you have to pay taxes on that income. Don’t use the word advertising in your acknowledgments or your paperwork to get sponsors.
2. Don’t induce or endorse your participants to buy from a company.
3. Develop a Corporate Sponsorship Policy that includes the IRS rules.
4. Sign contractual agreements with all of your sponsors including the IRS rules. Corporations don’t always know the nonprofit tax law.
5. Corporate sponsors are worth pursuing. These mutually beneficial relationships can provide long-term support for your nonprofit organization. Remember to share with your corporate sponsors the possible tax implications and set up an agreement.

Learn how to pursue mutually beneficial relationships with companies here. Or, if you’d like personalized advice on this topic, schedule a free consultation.