The Business of Charity

NPOs must structure corporate sponsorship payments carefully.


  • THE TREASURY DEPARTMENT ISSUED PROPOSED regulations in 2000 that are the latest round in the sponsorship payment debate between the IRS and NPOs. The regulations replace those proposed in 1993. Although they provide helpful guidance, they may also increase an organization’s risk of incurring the unrelated business tax.
  • THE MAIN ISSUE NPOs FACE IS WHETHER a payment received from a sponsor constitutes advertising or sponsor acknowledgement. Advertising is normally taxed as unrelated business income, while qualified sponsorship payments escape tax.
  • NPOs SHOULD STRUCTURE THEIR RECEIPTS as qualified sponsorship payments whenever possible. However, when NPOs also provide taxable substantial return benefits to sponsors, the NPO has the burden of valuing these benefits to avoid taxation of the entire sponsorship payment.
  • THE PROPOSED REGULATIONS INTRODUCE a controversial interpretation for exclusive provider arrangements. When an NPO accepts sponsorship payments for an event and agrees to limit products or services offered to the sponsors, the exclusive provider arrangement will result in a substantial return benefit to the sponsor and taxable income to the NPO. This will likely affect the way NPOs structure sponsor agreements.
  • THE NEW RULES ELIMINATE THE PRACTICE of allocating excess deductions between one unrelated business activity and sponsored events with substantial return benefits. Prior proposed regulations allowed an offset of profits and losses; the new regulations would require the two activities to be closely connected.
NANCY J. FORAN CPA, PhD, is associate professor of accounting at the University of Michigan in Dearborn. Her e-mail address in . BARBARA A. THEISEN, CPA, is associate professor of accounting at Oakland University in Rochester, Michigan. Her e-mail address is .

orporate sponsorships are big business. Charities and other not-for-profit organizations increasingly rely on these payments to support their missions. In fact, today it is unusual to find a charitable activity—large or small—that does not have a corporate sponsor. The Cotton Bowl is now the Southwestern Bell Cotton Bowl. The Bob Hope Desert Classic today is called the Bob Hope Chrysler Classic. Local businesses provide uniforms for little league baseball teams. Banks sponsor two-mile fun runs.

More in UBTI

For additional information on the taxation of corporate sponsorship and similar payments, IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations, revised in March 2000, is available online at .

CPAs need to know the tax implications of corporate sponsorship payments and proposed regulations regarding those payments. Those who advise or work for NPOs should be aware of the effect these rules will have on corporate sponsorship of charitable activities and events.


The IRS and NPOs have debated the taxability of corporate sponsorship payments for the last decade. The debate began when the IRS, noting the growth of lucrative sponsorship agreements between corporate America and NPOs, held that sponsorship payments Mobil Corp. made to the Cotton Bowl Athletic Association were considered advertising and thus taxable as unrelated business taxable income (UBTI).

The Treasury Department issued proposed regulations in 1993 which provided initial guidance on when payments were taxable. Congress amended the law in 1997 to exempt certain sponsorship payments from the unrelated business income tax. The proposed regulations the Treasury issued in 2000 will replace the 1993 regulations. An initial review suggests that more NPOs may now have payments taxed as UBTI under these new guidelines.


Even with the proposed regulations, the distinction between taxable advertising and tax-free sponsor acknowledgements remains clouded. Advertising, which is normally taxable to an NPO as UBTI, is defined as any message or programming material presented to the general public that promotes a business, service or product in exchange for a payment. On the other hand, an acknowledgement that can be characterized as a qualified sponsorship payment (QSP) is tax-free to the NPO.

QSPs are payments a business sponsor makes to an NPO that do not result in a “substantial return benefit” to the sponsor. The proposed regulations define a substantial return benefit as any benefit other than (1) the use or acknowledgement of the sponsor’s name or logo in connection with the NPO’s activities, or (2) goods or services the business provides to the sponsor that have an insubstantial value under current IRS guidelines. In addition, sponsors cannot receive the right (whether exclusive or not) to use an NPO’s intangible asset, such as a trademark, patent, logo or designation. However, displaying a sponsor’s name, logo or product lines in connection with an NPO’s activity would be tax-free to the organization.

Example. Tom’s Dairy Farm pays $2,000 to sponsor a charity’s annual pancake breakfast. A local restaurant prepares the breakfast. The dairy farm’s name and logo are displayed at the breakfast. The $2,000 payment is a QSP and is not included in the charity’s UBTI.

A QSP is a payment an NPO receives for a sponsored activity. The activity can be related or unrelated to the organization’s exempt purpose. That is, the activity can be solely a fundraising event.

Example. The City Youth Basketball League has a golf tournament to raise money for its activities. Third City Bank’s sponsorship of the tournament is a QSP.

For tax years beginning in 2000, benefits such as complimentary tickets, pro-am playing spots and donor receptions have insubstantial value if their fair market value does not exceed the lesser of $74 or 2% of the payment. The sponsor may also receive token items, such as bookmarks, calendars, key chains, mugs, posters or T-shirts, that include the charity’s name or logo if they have an aggregate cost of not more than $7.40 (adjusted for inflation).

Recognizing that not-for-profit projects are diverse, the proposed regulations allow sponsored activities to include a single event, such as a bowl game or a marathon; several related events, such as a concert series or basketball tournament; ongoing activities, such as an art exhibit; or continuing sponsorship of an entity’s operations. However, qualified convention and trade show activities and acknowledgements or advertising in NPO periodicals are not QSPs.

Example. Best Choice Dog Food contributes to the monthly newsletter of the Top Dog Kennel Club. An acknowledgement of its contribution is published in the newsletter. The contribution is not a tax-free QSP.


Knowing what can be included in sponsor acknowledgements is important to CPAs in identifying advertising. Permissible uses or acknowledgements include logos and slogans that are an established part of the sponsor’s identity. Lists of the sponsor’s locations, telephone numbers, brand and trade names and products or services are also allowed. In addition, it’s acceptable for the sponsor or the charity to display, visually depict and distribute (for free or at a cost) the sponsor’s products and services to the general public at the sponsored activity.

Example. Best Choice Dog Food sponsors the Top Dog Kennel Club dog show and distributes free dog food to those who attend. The company’s sponsorship payment qualifies as a QSP.

The definition of advertising includes oral or written messages that contain qualitative or comparative language, price information or other indicators of savings or value. Advertising also includes an NPO’s endorsement or inducement to purchase, sell or use a sponsor’s products. In addition, payments that are contingent upon attendance levels, broadcast ratings or other factors indicating the degree of public exposure to the sponsored event are considered advertising. The sponsor can, however, run separate advertisements on its own during the sponsored activity.

Example. Sparkle Soft Drinks sponsors a televised college baseball tournament. During the commercial breaks, Sparkle purchases broadcast time from the television station to advertise its products. Sparkle’s advertising does not affect the tournament’s treatment of the QSP.

Even if an amount does not qualify as a QSP, it may still be excluded from UBTI if the payment does not fall within the unrelated business income definitions. For example, unusual events and those conducted by volunteers generally are not unrelated business activities.

Example. A church has a pancake breakfast to raise money for an organ. Church members prepare the breakfast. Tom’s Dairy Farm agrees to pay $2,000 to the church if at least 500 people attend the breakfast. The dairy farm’s name and logo are displayed at the breakfast. Even though the $2,000 payment is not a QSP because the payment depends on attendance, the church does not include the payment in its UBTI because the breakfast is not a regular event and the work is done entirely by volunteers.


The 2000 proposed regulations removed a “tainting” rule found in the earlier regulations. It said that if any part of an activity was advertising, all of the payments the NPO received were advertising. Despite the demise of this unpopular rule, NPOs still face a number of hurdles.

If a sponsorship arrangement includes the NPO’s use or acknowledgement of the sponsor’s name, logo or product lines and also entitles the sponsor to benefits that would disqualify the payment as a QSP, the sponsorship payment is not totally disqualified. Rather, the rules treat the payment as two separate transactions if the NPO can show that a portion of the payment exceeds the fair market value of the substantial return benefit given to the sponsor.

Example. Sparkle Soft Drinks’ $1.5 million sponsorship of a college baseball tournament includes acknowledgements and advertising. The college demonstrates that the fair market value of the advertising is $1 million. Therefore, the QSP is $500,000.

An NPO must make a good faith effort to reasonably value the substantial return benefit, which may be a burden for some organizations. One alternative is to have separate contracts for each type of payment to reduce the UBTI risk. However, CPAs should make certain NPOs are careful here as well, since the IRS can treat the two separate payments as one if it determines the advertising portion was undervalued. The bottom line is that in all cases, the NPO must properly value the substantial return benefits it provides to sponsors.


The proposed regulations say NPOs should report QSPs they receive in the form of money or property (but not services) as contributions when determining the public support the entity receives. These payments appear in part I (Revenue, Expenses, and Changes in Net Assets or Fund Balances) of form 990. Donated services follow the existing reporting rules. Individual sponsors must determine whether their payments are deductible as business expenses or charitable donations. Advertising and other substantial return benefits are reported on form 990-T in accordance with existing laws.


One of the most controversial areas in the 2000 regulations is the restriction on exclusive provider arrangements. Exclusive sponsorship is a QSP, whereas limiting the competition by providing sponsor-only products or services is not.

As might be expected, many NPOs are unhappy with this restriction—exclusive provider contracts for events are common. The main activities targeted by the IRS appear to be beverage sales and athletic gear, although the tax authorities could challenge any exclusive provider contract subject to the regulations.

When the sponsor is both an exclusive sponsor and exclusive provider for a single payment, the fair market value of the provider arrangement (and any other substantial return benefit) is determined first.

Example. Swift Tennis Shoes pays $20,000 to be the exclusive sponsor of a local high school’s two-mile fun run. Only Swift Tennis Shoes can be displayed and sold at the race. The value of the exclusive provider arrangement is $12,000. The QSP is $8,000.

It remains to be seen whether the exclusive provider restriction will make it to the final regulations, but NPOs must prepare for IRS challenges if they omit exclusive provider payments from UBTI.


Another unpopular change in the 2000 proposed regulations involves the allocation of excess deductions from other unrelated business activities an NPO conducts. The prior regulations allowed an offset of excess deductions from one unrelated activity against a sponsored activity generating substantial return benefits. The new regulations reverse this rule. An NPO may offset excess deductions directly connected with a sponsored activity only against profits from a separate unrelated business activity with a close association to the sponsored activity. This could significantly increase an NPO’s UBTI when the two activities are not sufficiently related.

The proposed regulations provide an example involving sponsorship of an art museum exhibit that triggers the unrelated business tax. The illustration in the exhibit below shows the treatment of excess deductions under the 1993 and the 2000 proposed regulations. In both cases, the advertising and catalog sales are considered connected activities, while the actual exhibition is a separate event. Based on the change in the 2000 proposed regulations, NPOs with losses from sponsored activities will have an incentive to demonstrate that separate unrelated businesses are sufficiently connected with the sponsored activity to use the excess deductions.

1993 vs. 2000 Regulations

A not-for-profit art museum organizes an exhibition underwritten by a corporate sponsor. In return for a $100,000 payment, the museum agrees to advertise the sponsor’s product in its exhibition catalog. The example in the regulations assumes the museum is actively engaged in advertising activities, rendering the $100,000 taxable as UBTI. Direct advertising costs are $25,000. Sales of the exhibition catalog total $60,000, while direct catalog costs are $110,000. Expenses directly connected with conducting the exhibition total $500,000.

The museum’s UBTI under the 1993 and 2000 proposed regulations is shown below.

  1993 Proposed Regulations 2000 Proposed Regulations
Income $ 100,000 $ 100,000
Expenses (25,000) (25,000)
  Net profit 75,000 75,000
Sale of catalog:    
Income 60,000 60,000
Expenses (110,000) (110,000)
  Net loss (50,000) (50,000)
Exhibition costs (500,000) 0
UBTI $(475,000) $25,000
Source: Proposed Treasury regulations section 1.512(a)-1(e).


Despite their useful examples and interpretations, the 2000 proposed regulations leave some unanswered questions. For example, the role the Internet plays in determining or valuing substantial return benefits is unclear. Issues such as whether an electronic link to a sponsor’s Web page triggers a substantial return benefit remain to be decided. It is hoped oral and written comments the IRS gathered in the comment period will provide needed guidance in the near future.

Although the regulations are only proposals, NPOs may rely on them for payments received after 1997. In the meantime, organizations should

  • Establish rules for determining the fair market value of substantial return benefits provided to sponsors.

  • Evaluate whether a single contract is preferable or whether separate contracts for sponsorship and advertising are more advantageous when there are both QSPs and substantial return benefits.

  • Examine other unrelated business activities in which they are engaged to determine whether they are sufficiently related to the sponsorship activities to warrant offsetting excess deductions against profitable activities.

With careful planning, CPAs can help NPOs reduce their UBTI exposure.


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