Support Center Question of the Week: Corporate Sponsorships
We understand that our Nonprofit Accounting Support Center is a new and different product. That’s why each week we’ll highlight a question from a nonprofit organization to give you an idea how the service works and what people are asking. If you’re wondering how this service can benefit your nonprofit organization, read below.
This Week's Support Center Question
My organization is having a dinner gala to raise funds for our mission. We have a corporate sponsor who is paying $10,000. They will get a mention at the dinner, their name on the program and web site, banners, tickets to the event dinner, advertising in the program etc. My understanding is that only a portion of their sponsorship is deductible.
How do I calculate how much of a sponsorship is tax deductible and how much is not?
The Week's Answer from Associate Marci Cozby
The tax deductions of sponsorships are complicated. The key to configuring them depends on the return benefits the sponsor receives, and whether they are substantial or not.
Being mentioned at the dinner, having their name on the program and the website, and the other small benefits they’re receiving from you are considered insubstantial return benefits. Insubstantial value means the fair market value is not more than 2% of the amount they’ve paid to be a sponsor (10,000 dollars in this case). Offering such benefits to your sponsor will not result in your organization needing to pay taxes on those benefits.
Substantial benefits on the other hand, can have a negative effect on your taxes. If the benefit you offer is over the 2% threshold it is considered a substantial return benefit and would be treated as Unrelated Business Income (UBI), and could result in tax consequences.
Determining Substantial Benefits
The two benefits that could fall under the UBI category are the tickets to the dinner and the advertising in the program. To determine if they are, you need to determine if they are above or below the 2% threshold. In this instance, the 2% threshold is $200 (2% of $10,000).
To do so:
- Take the cost of each ticket (to the gala) and multiply it by the amount of tickets the sponsor received.
- To this number, add the amount that you charged other companies to advertise in the gala programs.
- If the total number you come up with is over $200, then you‘ll have to declare the overage as Unrelated Business Income.
- If the number you come up with is under the $200 limit, you will record the full 10,000 dollars as a donation.
The Corporate Sponsor
The sponsorship itself is 100% tax deductible for the corporate sponsor, as it is considered a donation.
Marci Cozby, Support Center Associate for Jitasa
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