A great way to raise funding for program services is through corporate sponsorship. If done correctly the entire payment will not be considered unrelated business income by the Internal Revenue Service. The IRS Code Section 513 exempts “Qualified Sponsorship Payments” from taxes imposed under IRS Code section 511. Reg. §1.513-4 defines qualified sponsorship payments as, “any payment by any person engaged in a trade or business with respect to which there is no arrangement or expectation that the person will receive any substantial return benefit.” When determining if payments are qualified sponsorship, it is important to note that it is irrelevant whether the sponsored activity is related to the organization’s exempt purpose.
If there is a substantial return of benefit to the corporation then the payments are no longer considered qualified sponsorship payments. The IRS determines substantial benefit by looking at the fair market value of items received by the corporation. However, if the aggregate fair market value of benefits received from the organization is less than 2% of the sponsorship payments then these benefits are disregarded. In Reg. §1.513-4 example (5) provides an illustration.
Q organizes an amateur sports team. A major pizza chain gives uniforms to players on Q’s team, and also pays some of the team’s operational expenses. The uniforms bear the name and established logo of the pizza chain. During the final tournament series, Q distributes free of charge souvenir flags bearing Q’s name to employees of the pizza chain who come out to support the team. The flags are valued at less than 2% of the combined fair market value of the uniforms and operational expenses paid. Q’s use of the name and logo of the pizza chain in connection with the tournament constitutes acknowledgment of the sponsorship. Because the fair market value of the flags does not exceed 2% of the total payment, the entire amount of the funding and supplied uniforms are a qualified sponsorship payment, which is not income from an unrelated trade or business.
When determining if the fair market value of substantial benefit received by the corporation is greater than 2%, the exempt organization does not have to consider use or acknowledgement of the corporations name or logo as defined in Reg. §1.513-4 paragraph (c)(2)(iv). However, Reg. §1.513-4 paragraph (c)(2)(iv) does not include advertising as described in Reg. §1.513-4 paragraph (c)(2)(v). Reg. §1.513-4 example (11) provides an illustration of how the exempt organization can recognize the payment of a corporation without creating unrelated business income.
W, a symphony orchestra, maintains a website containing pertinent information and its performance schedule. The Music Shop makes a payment to W to fund a concert series, and W posts a list of its sponsors on its website, including the Music Shop’s name and internet address. W’s website does not promote the Music Shop or advertise its merchandise. The Music Shop’s internet address appears as a hyperlink from W’s website to the Music Shop’s website. W’s posting of the Music Shop’s name and internet address on its website constitutes acknowledgment of the sponsorship. The entire payment is a qualified sponsorship payment, which is not income from an unrelated trade or business.
If your exempt organization does decide to partner with a business and accept payments, it is important that you consider what benefits the business will receive for its payments. If those benefits are not specifically excluded from taxation under Reg. §1.513-4 and the fair market value of those benefits are over 2% of the businesses payments, then you may want to consider restructuring the agreement, or budgeting for the taxes that will be owed to the IRS.