Corporate Sponsorship Money: Is it Taxable?
Ken Tornheim, CPA, CFE
Not-for-profit organizations have pursued corporate sponsorships for years, with good reason. Effectively executed, sponsorships can benefit both sponsor and organization. However, if your organization is not careful, a sponsorship can be deemed as paid advertising and your organization could end up liable for unrelated business income tax (UBIT). Although the Internal Revenue Code includes an exception from UBIT for certain sponsorship arrangements, navigating the rules can prove tricky.
“Qualified Sponsorship Payment” Exception
Generally, a “qualified sponsorship payment” received by a not-for-profit organization is not considered income from an unrelated trade or business. A qualified sponsorship payment is a payment of money, transfer of property or performance of services with no expectation that the sponsor will receive any “substantial return benefit.” Benefits returned to the sponsor can include:
- Goods, facilities, services or other privileges;
- Rights to use an intangible asset, such as a trademark, logo or designation; or
- An exclusive provider arrangement.
To be considered “substantial” by the IRS, the aggregate fair market value of all benefits provided to the sponsor during the year must exceed 2% of the amount of the sponsor’s payment to the nonprofit. If the total benefit exceeds 2% of the payment, the entire fair market value of the benefits (not just the excess amount) is a substantial return benefit.
“Use or Acknowledgment” Provisions
The regulations specify for purposes of the exception that a not-for-profit organization’s “use or acknowledgment” (as opposed to promotion, marketing or endorsement) of a sponsor’s name, logo or product lines will not constitute a substantial return benefit to the sponsor. Your organization’s use or acknowledgment can include:
- Logos and slogans (as long as they contain no qualitative or comparative descriptions of the sponsor’s products, services, facilities or company such as “the best sports drink available”);
- A list of the sponsor’s locations, telephone numbers or website address;
- Value-neutral descriptions (including displays or visual depictions) of the sponsor’s product line or services; and
- The sponsor’s brand or trade names and product or service listings.
You can include a sponsor’s product at the sponsored activity as long as there is no agreement to provide the sponsor’s product exclusively. Mere display or distribution of a sponsor’s product at an event, whether for free or for a fee, is not considered an inducement to purchase, sell or use the product (i.e., advertising). It will not affect the determination of whether the qualified sponsorship payment applies.
For example, say that a not-for-profit organization is holding an annual 10K race and is providing participants with drinks and prizes supplied free of charge by a sponsor. If the organization lists the sponsor’s name in promotional materials or includes it in the event name, those activities constitute permissible acknowledgment of the sponsorship. Therefore, the drinks and prizes are an exempt qualified sponsorship payment.
Note that contingent payments are not qualified sponsorship payments. If a sponsor’s payment is contingent on event attendance, broadcast ratings or other measures of public exposure to the sponsored activity, the payment falls outside the exception.
Allocation of Sponsor Payments
When a sponsorship comes with a substantial return benefit, only the part of the sponsor’s payment that exceeds the substantial return benefit is considered a qualified sponsorship payment. The remainder is unrelated business income.
Consider, for example, a not-for-profit organization that receives a large payment from a sponsor to help fund an event. The organization recognizes the support by using the sponsor’s name and logo in promotional materials. It also hosts a dinner for the sponsor’s executives and the fair market value of the dinner exceeds 2% of the sponsor’s payment.
The use of the sponsor’s name and logo constitutes permissible acknowledgment of the sponsorship; however, the dinner is a substantial return benefit. As a result, only that portion of the sponsorship payment that exceeds the fair market value of the dinner is an exempt qualified sponsorship payment.
Sidebar: Following the Rules for Exclusivity Arrangements
The Internal Revenue Code provisions about unrelated business income distinguish between “exclusive sponsor” and “exclusive provider” arrangements. An arrangement that acknowledges a corporation as the exclusive sponsor of a not-for-profit’s activity generally does not by itself result in a substantial return benefit that could incur the unrelated business income tax (UBIT) for an organization. Similarly, an arrangement that acknowledges a company as the exclusive sponsor representing a particular trade, business or industry will not constitute a substantial return benefit on its own.
On the other hand, an arrangement with a sponsor that limits the sale, distribution, availability or use of competing products, services or facilities in connection with the not-for-profit organization’s activity generally does result in a substantial return benefit. For example, if the organization agrees in exchange for a payment to allow only the sponsor’s products to be sold in connection with an activity, the sponsor has received a substantial return benefit.
Proceed With Caution
Application of the qualified sponsorship payment exception and the rules for unrelated business income are complicated. You should seek assistance from your financial advisor on how to mitigate the risk of incurring UBIT.
Time to “Go to School” Regarding the Use of Credit Cards
Implementing a Policy for Credit Card Use
Jim Quaid, CPA
Providing certain employees with credit cards may seem convenient. At schools, we often see directors, principals and office or business managers as authorized users. However, sharp criticism will likely follow if the cards are misused. And, while larger schools and other not-for-profit organizations typically have strong internal controls that minimize the risks, smaller organizations may need to take steps to protect themselves from credit card abuse. This begins with establishing a formal credit card policy.
Why You Need Rules
Credit card misuse could jeopardize any organization’s tax-exempt status and a policy can set up rules and requirements that make it easier to discern between valid and invalid charges.
How to Draft Guidelines
While each organization’s policy will vary according to its circumstances and priorities, most credit card policies should address the following issues:
Eligibility. It is a good idea to set restrictions on which employees can use credit cards. You might, for example, limit cards to full-time employees who travel regularly for their jobs, purchase large volumes of goods and services for the organization’s use or otherwise incur regular business expenses of a kind appropriately paid by credit card. You also should require written approval from a supervisor prior to obtaining a credit card. For expenses incurred by a school’s executive director or CEO, we recommend that his or her expenses be approved by someone on the audit/finance committee.
Prohibited Uses. Clearly identify prohibited uses for the cards, such as cash advances, bank checks, traveler’s checks and electronic cash transfers. And, explicitly state that the credit cards may not be used for personal expenses. You also might bar using the card for purchases of alcohol or other items inconsistent with your organization’s mission and values. Additionally, you may want to prohibit capital purchases, which may need to go through a more significant approval process.
Recently, one of our school clients added language to their guidelines asking employees to think twice and be mindful about their intended credit card purchase. Employees should consider how the purchase may be perceived by others. For example, employees should ask themselves, ‘If the purchase were to be highlighted on the front page of the newspaper, how would it reflect on the employee and the school?”
Your policy also should specify that reimbursement for returns of goods or services must be credited directly to the card account. The employee should receive no cash or refunds directly.
Spending Limits. In addition to restricting the types of purchases, your policy should set a spending limit. Or, the issuer can set a specific limit for each card depending on the user’s needs.
Unauthorized Charges. Many organizations require all employees to seek explicit pre-approval prior to incurring any credit card charge in order to comply with federal guidelines. Set limits for all card users of what can be charged without pre-approval. Clearly state that unauthorized credit card purchases and charges without appropriate documentation are the responsibility of employees, including any related late fees or interest.
Documentation. Employees must provide documentation — usually the original itemized receipt — to support all charges. For meal purchases, require employees to provide the names of everyone in attendance and a description of the business purpose of the meal to comply with IRS regulations.
Statement Reconciliation. Require card users to reconcile their charges to the monthly credit card statement within 10-15 days of the statement date. Request that all original receipts to be submitted to the accounting department in an organized manner. Provide users with a standardized format to expedite processing by requiring department coding and descriptions of each charge. Supervisors should indicate their review and approval of the charges by a signature and date on the receipt or on the required form.
Enforcement. A policy without an enforcement mechanism is simply a piece of paper. Your policy should state that violations will result in disciplinary action up to and including termination of employment and, where appropriate, criminal prosecution.
Once you communicate your credit card policy, require the employee to sign an acknowledgment stating that he or she has read and understands the policy and procedures governing credit card use.
Beyond the Policy
Establishing and enforcing a formal policy is only the first step your school or not-for-profit organization should take to reduce the risks associated with employee credit card use. Additional controls include having the monthly credit card statements reconciled in the accounting department and reviewed by senior management or others as applicable.
Sidebar: Employee Reimbursements and Accountable Plans
If your school or other not-for-profit organization decides against having credit cards altogether, there will be situations where employees will need to be reimbursed for expenses they have incurred personally. Take care to ensure that your arrangement qualifies as an “accountable plan” under IRS regulations so that reimbursements paid are not reported as compensation to the employee. An accountable plan must require that employees:
- Have paid or incurred expenses for a deductible business purpose;
- Adequately account for these expenses within a reasonable time period (within 60 days after they were paid or incurred) by providing a statement of expense, an account book or a similar record in which they entered each expense at or near the time incurred, along with evidence such as receipts of travel, mileage and other business expenses; and
- Return any excess reimbursement or allowance within a reasonable time period (within 120 days after the expense was paid or incurred).
If the plan does not satisfy all three requirements, reimbursements must be reported as wages.
For any questions on implementing a credit card policy at your organization, contact Jim Quaid at firstname.lastname@example.org, or call him at 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.