Question: How can our organization avoid the Taxation of Corporate Sponsorship Donations?
Answer: One effective way for a nonprofit to generate revenue is to pursue a corporate sponsorship wherein the sponsor makes cash or in kind donations in exchange for public awareness of its products. In order for these donations to remain tax-exempt, certain rules must be followed. In return for the donations, the corporation is entitled to receive public thanks and recognition for it’s support and may even provide samples of products at various charitable events. However, the nonprofit may not in any way make product representations, comparisons or requests for public patronage of any given product. The test utilized by the IRS to determine whether the transaction is taxable is the “substantial return of benefit” test. This test focuses on whether the corporate sponsor had an expectation of substantial return for its donation. It is permissible under this test for the nonprofit’s website to provide the sponsor’s name, address, and links to the sponsor’s website, as long as product endorsements are not made.
In some instances, a nonprofit may want to provide thanks to the sponsor in several different ways despite the tax results. The nonprofit may wish to do so in a way that might be taxable and one that might not be taxable. For example, the nonprofit may both thank its sponsor on its website and recommend the patronization of its products. In this event, the donation might only be partially taxed.
Since the application of these rules may be somewhat murky and since uninformed decisions may result in unanticipated tax liability, it is always best to seek the advice of counsel when in doubt regarding corporate sponsorship donations.