Spring is well under way and summer is right around the corner. This is prime-time for not-for-profit to raise awareness for their causes, fundraise and recruit members and benefactors by holding events.
Often these events are sponsored by wealthy private citizens, other not-for-profit and public or private companies that desire to give back to the community, improve their public reputation or possibly for the tax deduction – or all the above.
“Properly structured sponsorship agreements can provide the not-for-profit the support it needs and avoid or minimize tax on unrelated business income or UBI.”
Sponsorship Agreements are at the Heart of It
Companies looking to sponsor events and non-profits, not-for-profits, community organizations can, and really should, have a symbiotic relationship. A written document that sets forth the details of that relationship increases the likelihood that it will be a good one with lasting benefits to all.
Whatever the motivations for sponsorship are, and regardless of the type of sponsor (individual, corporate or other not-for-profit organizations, each party to the arrangement should insist on having a written agreement between the sponsor and the event organizer (or the not-for-profit behind the event, since the two may be different). Such an agreement is often called a “Sponsorship Agreement” and like any other contract, it is the key stone of the parties’ relationship.
What Goes Into a Sponsorship Agreement
A Sponsorship Agreement can and should be quite detailed and complex, and will set forth the details of the arrangement, such as:
1. The specific event that will be sponsored,
2. Who will pay the sponsorship funds and to whom the funds will be paid and when,
3. What does the sponsor receive in terms of ‘recognition’ for the sponsorship,
4. What will ‘recognition’ entail exactly,
5. Other benefits the sponsor receives such as prime booth location at a trade show, free admission to the event for X number of sponsor representatives, size and location of sponsor banners, placement of recognition statements or advertisements* in newsletters, event flyers, websites, etc.,
5. Indemnification clauses or liability for event-related injuries,
6. Insurance requirements, etc.
Number 4 above can be extremely important to both parties. The content of any ‘sponsor recognition’ can have the unintended effect of turning a tax deductible sponsorship into taxable advertising – something neither party wants as it discourages the sponsorship and diminishes the benefits a sponsor receives.
Properly structured sponsorship agreements can provide the not-for-profit the support it needs and avoid or minimize tax on unrelated business income (UBI).
Tax Implications of Sponsorship: Return Benefits
IRS regulations issued in 2002 (IRC Reg. §1.513-4) define a qualified sponsorship payment as a payment for which the sponsor receives no substantial return benefit other than mere ‘acknowledgement’ or ‘recognition’ by the organization. This acknowledgement or recognition can be more than a simple ‘thank you for the dosh’. It can include:
1. Sponsor’s name and logo,
2. Slogans or brands the sponsor uses as long as they do not contain comparative or qualitative statements concerning the sponsor’s business, products or services (i.e. comparing a sponsor’s line of widgets to a competitor’s or claiming theyre better quality than another’s),
3. Sponsor’s contact information and businesss or retail locations,
4. A general description of the sponsor’s business, products or services (subject to the restriction on comparative or qualitative statements).
The fundamental risk a not-for-profit and an event sponsor face is that an acknowledgement or recognition statement, or other form of benefit, may deemed a substantial return benefit to the sponsor. An example of this would be if a recognition statement contained an inducement to buy the sponsor’s products or use its services. In the event that happens, the recognition statement may be deemed ‘advertising’ and becomes taxable as unrelated business income. Even an endorsement by the not-for-profit of an event sponsor’s products or services can transform the recognition or acknowledgement statements into a taxable advertising message.
* However, you may be wondering how an advertisement in a newsletter is dealt with under the IRS regulations in terms of whether it is tax exempt or constitutes a substantial return benefit.
The IRS regulations allow the parties to allocate the payment into different portions which are then analyzed for tax purposes. For example, a sponsor’s banner with logo (assuming it contains no inducement-to-buy statements) will almost certainly be deemed mere acknowledgement of the sponsor. But advertisements in the not-for-profit’s newsletter are, by definition, more than mere recognition and would constitute inducement to buy or use the sponsor’s products or services. (But, note that any acknowledgment or recognition that appears in a periodical is almost always deemed a substantial and taxable benefit even if it does not contain inducement to buy language).
IRS regulations apply fair market values to the return benefits that fall outside the scope of an acknowledgment or recognition benefit. Therefore, the market rate for the newsletter advertising would be deducted from the sponsor’s total payment. The balance remaining would be deemed a qualified sponsorship and a contribution for purposes of IRS Form 990. The fair market value of the advertising would be deemed advertising revenue to the not-for-profit and reportable on its Form 990-T.
Some points to also consider are avoiding exclusive provider arrangements as part of a sponsorship agreement. These will generally be deemed a taxable return benefit to the event sponsor. But a Sponsorship Agreement which makes the event sponsor the ‘exclusive sponsor’ of the event will generally not, in and of itself, be deemed a taxable return benefit to the sponsor. Also, with respect to website placement of sponsor acknowledgements and recognitions, a ‘click through’ logo that takes the user to the sponsor’s website will generally not be deemed a substantial, and therefore taxable, benefit to the sponsor if there is no endorsement by the not-for-profit on its website or the sponsor’s website.
Another important item in the regulations is an exception which occurs when an acknowledgement appears in a periodical: this will almost always be considered as advertising, even if it does not contain inducement-to-buy language.
The best way to avoid these circumstances is to first clearly set forth the responsibilities of the event sponsor and not-for-profit in the Sponsorship Agreement with respect to recognition and acknowledgment statements as well as the requirements for same under the law. Second, properly drafted acknowledgement and recognition statements are a must have.
In terms of costs and consequences, these are no-brainers for both parties. The legal costs for a customized Sponsorship Agreement and recognition statements are likely minor relative to the funds raised and given the risk of fallout from not having these properly done by a legal professional. If you need assistance negotiating, drafting or reviewing a Sponsorship Agreement, contact the Boston Business Lawyers at The Jacobs Law LLC.
Your Attorneys For Sponsorship Agreements
Posted by TJLs Mobile Boston Business Lawyers