Note: Written by Sarah Pack, National Breast Cancer Foundation Advisory Council member & Associate Attorney at Asiatico Law, PLLC
Corporate partnerships have become an essential way for nonprofits to maximize their funding to fulfill their missions and support their operational goals. These relationships have unique benefits for both the nonprofits and partner corporations. However, there are important limitations in how the partnerships are structured that could impact the nonprofits’ tax-exempt status and thereby their ability to serve their communities.
Qualified sponsorship payments vs. advertising
The key consideration is whether payments from corporate partners to nonprofits are qualified sponsorship payments in accordance with IRS guidance or merely advertising. We’ll take a look at what this means and how IRS guidelines impact charitable partnerships:
1. Promoting for-profit companies is generally considered a business activity not related to a nonprofit’s charitable purposes. Such payments will be considered taxable advertising payments if the sponsorship delivers a substantial return benefit to the sponsor.
- Substantial return benefits include goods or services that have a substantial value (e.g., those with a fair market value of more than 2% of the sponsorship payment).
There are a variety of factors the IRS looks at to determine whether there is a substantial return benefit. Here are some messaging guidelines to help corporate partners and nonprofits ensure their sponsorship payments are not taxable:
- Giving general acknowledgment of a sponsor by highlighting its name, logo, website, and contact information on a nonprofit’s website, social media platforms, or printed media.
- Displaying a sponsor’s products or services at a nonprofit event or activity or online spaces without specifically endorsing such products or services.
- Providing free samples of a sponsor’s products or services at a nonprofit event or activity without specifically endorsing them.
- Linking to a sponsor’s website homepage rather than to a page on the website where products or services are marketed or sold to the public.
- An outright endorsement of a sponsor.
- Use of qualitative or comparative language to describe a sponsor’s products or services.
- Inducing a nonprofit’s followers or members to buy a sponsor’s products or services.
- Linking directly to a sponsor’s webpage where products or services are purchased by the general public.
2. Nonprofits are not allowed to accept payments from corporate partners that are contingent on reaching a specific size of audience (for example a certain number of attendees at an event or a specific number of likes on a social media post). They are also prohibited from providing advertising opportunities to sponsors at no charge that would typically be purchased by paid advertisers.
Sponsors may be acknowledged as the exclusive partner or sponsor of an event or activity if the nonprofit does not agree to limit the distribution of competing products or services in exchange for the sponsorship payment.
So why is this all so important?
In addition to being required to pay taxes (called unrelated business income tax, or UBIT) on payments that do not meet the qualified sponsorship payment criteria, nonprofits cannot count these funds as public support. Public charities must generally receive at least one-third of their revenue from public support. This public support can include revenue from program services, like qualified sponsorship payments, but it cannot include any revenue subject to UBIT. If the IRS finds a nonprofit has too much unrelated business income in proportion to its charitable activities, the nonprofit may lose its tax-exempt status.
How can we both achieve success?
Nonprofits and partners can work together to find ways to receive acknowledgement and recognition without explicitly promoting or advertising the charitable partner, which could have an end result of a nonprofit losing its tax-exempt status.
Questions to keep in mind as cause-marketing partnerships develop:
- What are the mutual goals of each organization?
- What type of partnership is this?
- What kind of acknowledgement will the partnership receive?
- What stories can be used to share why each organization chose to partner together and their hope for impact?
It is important for corporate partners to understand the limitations so they don’t have unrealistic expectations of what they may receive in return for their sponsorship dollars. Nonprofits will not be able to provide anything that the IRS may see as a substantial return benefit. Despite these limitations, corporate partnerships can still work to achieve the individual goals of both parties and positively impact communities.