Erin Reeve | |
December 18, 2017
As your probably know, nonprofits enjoy benefits that for-profits do not, including tax-exempt status. This exemption only applies to revenue earned from activities that are related to their mission - and this status can be revoked if too much of their revenue is earned from unrelated activities. Understanding the difference between exempt and nonexempt activities is important for nonprofits to (1) maintain their tax-exempt status, and (2) plan their budget efficiently.
Advertisement and Sponsorships
Sometimes, there is a fine line between which activities are related - and which are not (which can be pretty confusing!). Of the most challenging is understanding the difference between event sponsorship and advertisements.
While both can bring in additional revenue, advertising revenue is deemed by the IRS as unrelated (which means that it is taxable) - while sponsorship revenue is considered related (which means that it is exempt). This is important to know - especially when you consider that advertisement revenue is usually taxed at ~15-45% (1).
So, how can you tell the difference?
While both advertisements and sponsorship create knowledge and awareness about a sponsor and their products, an advertisement actively promotes a sponsors’ product. This means when a sponsorship includes subjective or competitive language, pricing (including savings/discounts), and/or calls to buy or use sponsors’ products (1) - it is considered an advertisement.
Alternatively, sponsorship should only contain neutral (non-promotional) sponsor information and language (e.g., company name, logo, slogan and description, product list). Sponsorship can also involve handing out sponsors’ products during the event (1).
NOTE: This article is for general reference and information, and is not intended to guide budget planning. The IRS has extensive documentation about taxes on its website. Contact your Euclid Client Support Representative to learn how ClearVantage Association Management Software can help you manage each more efficiently.
Resources
- http://www.aemcpas.com/cpa-firm/news/Sponsorship-Advertising.html
- http://smallbusiness.findlaw.com/incorporation-and-legal-structures/non-profit-taxes-when-non-profits-make-a-profit.html