Q:
I have a question about sponsorship. When people sponsor
an event, what guidelines can we use to assess deductibility?
For instance, it is clear that any tickets they are given
to the event are non-deductible for the fair market value,
just as for any other participants. However, what about
the other, less tangible, benefits such as a marketing
presence?
A:
First, let me say that I’m glad you brought up the
point that when an individual goes to claim a deduction
for his or her sponsorship, the fair market value of such
“benefits” as “free” tickets must
be subtracted. Too many people are not aware of or do
not think about this. So you’ve contributed to the
educational value of this column already.
The
issue of the less tangible benefits to a sponsor is an
important one – and something we will discuss. However,
it also requires us to talk about the thin line an organization
walks, potentially opening it to paying unrelated business
income tax (UBIT).
Certainly,
some people will choose to sponsor your event strictly
as a means of supporting your organization. Others will
do it because they can’t say no to the person who
solicited them. However, few of us would question that
most people see a marketing value to their sponsorship,
especially if they accept the responsibility for sponsorship
on behalf of their business. The IRS does not expect the
organization to assign a value to this for deductibility
purposes.? What it does expect is that the organization
distinguish between marketing and advertising.
Guidelines
are found under the Taxpayer Relief Act of 1997. You may
publicly thank the sponsor, display the sponsor’s
logo, name the event after the sponsor and give out samples
of the sponsor’s product at the event. (Marketing)
You may not urge people to support the sponsor. Nor may
you endorse the sponsor by using such value-laden words
as “the best.” You can’t ask people
to buy the sponsor’s goods or services. (All advertising
and subject to a tax liability) If the sponsor requires
that you hand out product samples, that’s advertising.
If the sponsor buys space in an ad journal, it’s
advertising! (Even if there is no commercial intent in
doing so, the IRS sees commercial value in the “goodwill”
the sponsor receives for buying such an ad.) Does your
financial backing hinge on having an exclusive relationship
with the sponsor? Is the amount of the sponsorship tied
to a certain level of exposure such as attendance? These
would be seen as proof of an advertising contract.
Accepting
advertising is not bad. If the promised monies are large
enough it may benefit the organization to pay the UBIT.
However, you want to be sure you know when you are crossing
the line.
