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.