CORPORATE SPONSORSHIPS – OVERVIEW AND PRACTICAL
CONSIDERATIONS
Introduction
Many tax-exempt organizations (“Organization(s)”) utilize corporate sponsorship
as a means of generating revenue to support their tax-exempt activities. In general,
Organizations must pay tax on any income derived from business activities that are not
substantially related to their tax-exempt purposes. This tax is known as unrelated
business income tax, or “UBIT.” However, if income from a corporate sponsor meets
certain requirements specified in the Internal Revenue Code of 1986 (the “Code”),1 it will
be considered a qualified sponsorship payment (“QSP”), and exempt from UBIT. A
corporate sponsor will also be permitted to take a charitable contribution deduction for
QSPs made to Organizations exempt under Section 501(c)(3) of the Code. 2
If all or part of the income from a corporate sponsorship payment does not meet
the Code requirements for a QSP, that income will be taxed as UBIT to the Organization.
In addition, a corporate sponsor will not be permitted to take a charitable contribution
deduction for any part of a sponsorship payment that does not meet the requirements for
designation as a QSP.
1
See Section 513(i). There are exceptions to this general safe harbor. It is important to consult with your
professional tax advisor regarding your particular situation.
2
Please note that qualified corporate sponsorship payments to Organizations other than Section 501(c)(3)
organizations are not deductible as charitable contributions.
Corporate Sponsorship Overview
QSPs must meet specific requirements, and cannot:
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Be contingent on the degree of public exposure that the sponsor receives
due to the sponsorship;
Entitle the sponsor to the use or acknowledgement of the name, logo, or
product lines of the sponsor’s trade or business in regularly scheduled and
printed material published by an Organization, and that is not related to a
specific event conducted by the Organization; or
Be made in connection with a qualified convention or trade show activity
as defined in the Code.3
The amount of a sponsorship payment that qualifies as a QSP will also be determined by
any return benefit the corporate sponsor may receive from the Organization.
In general, an Organization must take the following four steps before entering into
any sponsorship agreement:
1. Determine whether or not the sponsorship is a type that is specifically
disallowed by the Code as indicated above;
2. Determine whether the corporate sponsor will receive a return benefit;
3. Determine the type of return benefit the corporate sponsor will receive;
and
4. Value the return benefit.
Practical considerations for evaluating and valuing return benefits are discussed
below.
Practical Guidelines – Return Benefits
Substantial Return Benefit. The Internal Revenue Service (“IRS”) will examine
all return benefits that a corporate sponsor receives from any source in determining
whether the benefits are substantial. A substantial return benefit is a benefit that a
sponsor receives in return for its sponsorship that is more than 2% of the amount of the
sponsorship payment. If a benefit is not substantial, it is disregarded and the entire
sponsorship payment is a QSP. Please see Exhibit A, Example 1, for an example of a
return benefit that is not substantial.
3
See Section 513(d)(3)(B). A qualified convention or trade show activity is a convention and trade show
that an Organization carries out in conjunction with a convention, annual meeting, or show, if one of the
purposes of the event is promoting and stimulating interest in the Organization’s activities.
If the value of the return benefit is more than 2% of the amount of the sponsorship
payment: the entire value of the benefit is considered a substantial return benefit; the
entire amount of the substantial return benefit is subject to UBIT; and only the net
amount of the corporate sponsorship payment is a QSP. Please see Exhibit A, Example
2, for an example of the calculation of a return benefit that is substantial.
Types of Return Benefits: Use or Acknowledgment. The use or
acknowledgement of a sponsor’s name, logo, or product lines generally is not considered
a return benefit. An Organization may therefore acknowledge:
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The sponsor’s logo or slogan, provided that the Organization’s use of the
logo or slogan does not contain qualitative or comparative descriptions of
the sponsor’s products, services, facilities, or company;
A list of the sponsor’s locations, telephone numbers, or Internet address;
Value neutral descriptions, including displays or visual depictions of the
sponsor’s goods or services; and
The sponsor’s brand or trade names and product or service listings.
Even if a sponsor’s logo or slogan contains qualitative or comparative
descriptions, the Organization’s use of the logo or slogan would not be prohibited. An
Organization may therefore use a sponsor’s slogan even if the slogan is “better products,
better services.” The Organization cannot, however, use language that is not part of the
sponsor’s slogan or logo. See Exhibit A, Example 3. The Organization may also display
or give away a sponsor’s products at a sponsored event.
Types of Return Benefits: Advertising. Advertising may be considered a
substantial return benefit, depending on the value of the benefit to the sponsor.
Advertising is a message that promotes or markets a trade or business, or any service,
facility or product. Please note that if a message contains both advertising and an
acknowledgement, the message is tainted and the entire message is considered
advertising. A message will be considered advertising if it contains:
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Qualitative or comparative language;
Price information;
Indications of savings or value;
An endorsement by the Organization; or
Inducements to buy, sell, or use any company, service, facility or product.
The distinction between advertising and use or acknowledgement is illustrated in Exhibit
A, Example 3.
Types of Return Benefits: Exclusivity Arrangements. A QSP may include an
exclusive sponsorship arrangement, but if the QSP also includes an exclusive provider
arrangement, the value of the exclusive provider status must be valued as a return benefit.
An exclusive sponsorship arrangement is one in which the sponsor receives the
right to be called the sole or exclusive sponsor of one of the Organization’s activities.
Payments for exclusive sponsorships are QSPs. In contrast, an exclusive provider
arrangement is one in which the sponsoring corporation receives the Organization’s
agreement to limit the sale or use of another company’s products, services, or facilities in
connection with the Organization’s activities. Exclusive provider status must be valued
as a return benefit; therefore, if the value is more than insubstantial, the payment is
excluded from the QSP as a substantial return benefit and subject to UBIT. Exhibit A,
Example 4 includes both an exclusive provider arrangement and an exclusive sponsor
arrangement.
Types of Return Benefits: Hyperlinks to Sponsor Web Sites. If the Organization
provides a link to a sponsor’s Website on its Website, the link will not be considered a
return benefit; however, if the sponsor’s Website has language stating that the
Organization endorses the sponsor’s products or services, it will be considered a
substantial return benefit.4 Please see Exhibit A, Example 5.
Valuing a Return Benefit. An Organization must value and date the total return
benefit to each of its corporate sponsors. The date of the benefit will depend on whether
the agreement is written or oral.
If the agreement is in writing, the date of the benefit to the sponsor is the date the
sponsor and the Organization sign the agreement. If the Organization and the sponsor
materially change the agreement (e.g. changes to the amount of the sponsorship or the
length of the contract), thereafter, the benefit is dated as of the date that the Organization
and the sponsor made the change. The Organization should take special care if written
agreements include ongoing sponsorship payments and ongoing return benefits. Please
see Exhibit A, Examples 6 and 7, for considerations in drafting sponsorship agreements.
If the agreement is oral, the value of the benefit is determined based on the date
the sponsor receives the benefit.
Source of Return Benefit. The IRS examines return benefits from all sources.
Therefore, if a return benefit is provided by a third party, the benefit is included for
purposes of determining if the payment is a QSP. Please see Exhibit A, Example 8.
4
Please note that an Organization’s endorsement of any for-profit must also be evaluated in light of other
private benefit and donor-relations issues.
IRS Circular 230 Disclosure. To ensure compliance with any requirements imposed
by the IRS, we inform you that federal tax advice, if any, contained in this document
(including any attachments) is not intended or written to be used, and cannot be
used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or
(ii) promoting, marketing or recommending to another party any transaction or
matter addressed herein.
Corporate Sponsorships - Examples
Example 1
Organization and Company X enter into a sponsorship agreement whereby Company X
pays Organization $100. Company X receives a return benefit worth $2. Since the return
benefit is not worth more than 2% of the amount of the sponsorship payment, the return
benefit is not substantial and the entire payment is a Qualified Sponsorship Payment
(“QSP”).
Example 2
Organization and Company X enter into a sponsorship agreement whereby Company X
makes a corporate sponsorship payment of $100. Company X receives a return benefit
worth $5. Since the return benefit is worth more than 2% of the sponsorship payment,
the return benefit is substantial. Only $95 of the sponsorship payment is a QSP, and the
remaining $5 is subject to UBIT and is not a tax deductible contribution for the sponsor.
Example 3
Organization and Company X enter into a corporate sponsorship agreement. Company
X’s slogan is, “The nation’s leading hockey equipment supplier.” Organization may
display Company X’s slogan and logo even though it contains qualitative or comparative
language because the slogan is an established part of Company X’s corporate identity.
The entire amount that Company X pays Organization to display the Company X logo or
slogan is a QSP.
Organization cannot, however, state that Company X is “Organization’s preferred hockey
equipment supplier.” If Organization endorses or states a preference for the product of a
sponsor, that constitutes a return benefit of advertising, and may disqualify part of the
sponsorship payment.
Example 4
Organization and Company X enter in a corporate sponsorship agreement where by
Company X makes a corporate sponsorship payment of $100 to Organization and is the
exclusive sponsor of a Organization event educating youth about basketball. This
exclusive sponsorship is a QSP and not subject to UBIT.
Assume, however, that Organization and Company X enter the same agreement ($100
from Company X to Organization) and Organization agrees that only Company X
products will be served/ used/ displayed at the event. This is an exclusive provider
arrangement. If the value of the exclusive provider component to Company X is less than
2% of the sponsorship payment, that component will be disregarded and the entire $100
will be a QSP.
If, however, the value of the exclusive provider agreement to Company X is $5, the
return benefit is substantial and only $95 of the sponsorship payment is a QSP, and the
remaining $5 is subject to UBIT.
Example 5
Organization and Company X enter into a corporate sponsorship agreement whereby
Organization agrees, among other things, to put a link to Company X’s website on the
front page of Organization’s website. The amount of the sponsorship payment is $100.
If Organization’s website states that Company X is Organization’s preferred hockey
equipment supplier, Company X receives a return benefit, and Organization must
undergo the return benefit value analysis to determine the value of the benefit and the
amount of the payment, if any, that will not be a QSP.
However, if Organization’s website does not endorse Company X’s products or services,
the link to Company X’s website on Organization’s site is merely a use or
acknowledgement and the entire payment is a QSP.
Example 6
Organization and Company X enter into a sponsorship agreement on January 1, 2008.
The agreement is for two years, 2008 and 2009. Under the agreement, Company X will
pay Organization $100 annually and Organization will provide Company X with
advertising. On 1/1/2008, the value of the advertising is $2. Since the value of the
advertising is not more than 2% of the value of the sponsorship payment in 2008, the
value of the advertising is disregarded, and the entire $100 is a QSP.
In 2009, the advertising’s fair market value has increased to $5, but the value of the
advertising for purposes of Company X’s return benefit is still $2 (the advertising’s value
on the date the agreement was signed.) The value of the advertising received in 2009 is
therefore disregarded and the $100 payment is a QSP.
Example 7
Organization and Company X enter into a sponsorship agreement on January 1, 2008.
The agreement is for two years, 2008 and 2009. Under the agreement, Company X will
pay Organization $100 in 2008 and $50 in 2009 and Organization will provide Company
X with advertising. On 1/1/2008, the value of the advertising is $2.
Since the value of the advertising is not more than 2% of the value of the sponsorship
payment in 2008, the value of the advertising is disregarded and the entire $100 received
in 2008 is a QSP. However, since the value of the advertising is more than 2% of the
payment in 2009, the advertising is a substantial return benefit and only $48 of the $50
payment is a QSP.
Example 8
Organization and Company X enter into a corporate sponsorship agreement
whereby Organization agrees, among other things, to put Company X’s name and logo on
the playing field during its little league baseball finals. The amount of the sponsorship
payment is $100. ABC Broadcasting will broadcast the game on television. The
agreement provides that ABC Broadcasting’s television cameras will focus on
Corporation X's name and logo on the playing field at certain intervals during the game.
Organization's use of Corporation X's name and logo on the playing field during
the television broadcast constitutes acknowledgement. The focus on Corporation X’s
name and logo by ABC Broadcasting’s cameras also constitutes acknowledgment.
Therefore, the entire $100 payment is a QSP.
VALUATION WORKSHEET: ANALYSIS OF SPONSORSHIP ARRANGEMENT
This is a sample form, which is partially completed for illustrative purposes.
Sponsor: ________________________
Sponsor-Provided Benefits
Value
Notes/Considerations/Questions
Cash contribution
$$$
Any restrictions on use of the funds?
TOTAL VALUE PROVIDED BY SPONSOR: _____________
Benefits provided by [Nonprofit
Organization]
Value
Notes/Considerations/UBIT Exceptions
Title Sponsorship
N/A
Not a substantial return benefit.
Logo/sponsorship announcement on all
promotional materials for the Event.
N/A
Not a substantial return benefit.
Logo/sponsorship announcement on Event
website with link to Sponsor’s website.
N/A
Not a substantial return benefit.
Nonprofit organization needs to review and
approve of Sponsor website’s use of nonprofit
organization’s IP and its characterization of the
sponsorship relationship to ensure no substantial
return benefit.
VIP passes
$$$
Benefit that must be valued for purposes of the
2% test (to determine if there is a substantial
return benefit).
TOTAL VALUE PROVIDED BY [NONPROFIT ORGANIZATION]: __________
This information is not intended as tax or legal advice.
BASIC STEPS FOR DETERMINING WHETHER PAYMENTS RECEIVED FROM SPONSORS ARE
“QUALIFIED SPONSORSHIP PAYMENTS”
The following steps are meant to illustrate application of some of the general rules governing sponsorship
payments. They do not address all of the exceptions that apply to such rules. This information is not intended as
tax or legal advice. The tax implications for each organization can be different depending on the specific facts and
circumstances involved. The following steps are not intended to be relied upon for your organization’s specific
situation. These steps are provided only for teaching and illustrative purposes. Always consult professional
advisors to determine how these rules would apply to your organization’s sponsorship arrangements.
IRS Circular 230 Disclosure. To ensure compliance with any requirements imposed by the
IRS, we inform you that federal tax advice, if any, contained in this document
(including any attachments) is not intended or written to be used, and cannot be used, for
the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting,
marketing or recommending to another party any transaction or matter addressed herein.
Qualified sponsorship payments are generally not subject to federal tax on unrelated business income. 5
1. Use the first table on the attached spreadsheet to compute the total fair market value of all of the
benefits received from the sponsor.
2. Next, use the second table on the attached spreadsheet to compute the total fair market value of all the
benefits provided to the sponsor. List all benefits including but not limited to any advertising,
exclusive provider arrangements, and rights to use intangible assets of the exempt organization.
Do not count the following disregarded benefits:

The value of allowing for the use or acknowledgement of the name or logo (or product lines) of
the sponsor’s business in connection with the activities of your organization.
3. Determine the percentage of benefits provided to the sponsor over benefits received by the sponsor. If
the benefits provided by your organization to the sponsor (or sponsor’s designee) exceed 2% of the
total amount received from the sponsor, then the entire fair market value of the benefits provided to the
sponsor (and not merely the excess amount) is a “substantial return benefit.”
4. Only the portion, if any, of the payment from the sponsor that exceeds the fair market value of the
substantial return benefit is a “qualified sponsorship payment.”
5. The unrelated business income tax rules apply to any payment that is not a “qualified sponsorship
payment.”
For more information, please contact:
5
There are exceptions to this general safe harbor. It is important to consult with your professional tax advisor regarding your
particular situation.
This information is not intended as tax or legal advice.