Nonprofit organizations love sponsors who support their programs and special events. However, nonprofits need to understand the difference between sponsorship and adverti
In normal circumstances, a non-profit undoubtedly benefits from a relationship with a person or organization that underwrites part or all of a program or event. The IRS, however, is much more interested in whether that organization benefits from their relationship with the non-profit.
Defining Sponsorships
When an organization provides money and receives an “insubstantial” amount of benefit for it, that is considered a sponsorship. An insubstantial benefit would be something along the lines of “Made possible in part by [Sponsor Name]” or a small logo.
Defining Advertising
If the organization providing money receives a “substantial” benefit from their relationship with the nonprofit, then this is considered advertising. Some advertising is obvious – paid ads in the back of a nonprofit’s newsletter, for instance, or a big banner at a special event. Basically, any time an organization buys and controls a certain amount of space or time, that is advertising.
Other forms of advertising, however, can be more subtle. Endorsing a funder, no matter how well deserved, is quite beneficial to that organization, and thus considered advertising. (For instance, “Made possible in part by [brand name], the brand we use and trust.” Allowing a funder to put brochures into grab bags would also be considered a form of advertising.
Why It Matters
A sponsorship is considered something akin to a donation. It has no tax repercussions for 501(C)3 non-profits and should be tax-deductible for the donor. However, advertising is considered Unrelated Business Income (UBI) and will be subject to UBI tax if it is not a one-time occurrence. This is not to say that non-profits should not accept advertisements. Some do, all the time, with great success. But non-profits do need to be aware of the accounting and tax implications of doing so.
