Our sector loves the word sponsorship. Whether it’s sponsoring children, saving animals, or underwriting a golf outing or gala, we are always working for sponsor support. Not all sponsorships are the same in the eyes of your auditor or the IRS, though. Some sponsorships are charitable donations whereas others are actually non-charitable support. Here’s how to determine which you’re receiving:
If you’ve run a ticketed fundraising event for your organization, you’ve probably been asked for a receipt for the tickets. Similarly, you might have been asked why the receipt didn’t contain charitable tax receipt language. When someone receives a benefit for their “gift” to a nonprofit organization, the IRS determines that their support is not tax-deductible. The “benefit” can be anything from promotion as the title sponsor of an event, for example, or simply a meal and entertainment at that same event. Straight from IRS Topic #506: Charitable Contributions, here is the language that governs gifts to nonprofits:
“If you receive a benefit in exchange for the contribution such as merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can only deduct the amount that exceeds the fair market value of the benefit received or expected to be received.”
To test whether funds received are a tax-deductible gift or a sponsorship, see if there is reciprocity involved. Your organization shouldn’t be required to provide anything other than gratitude and a tax receipt for charitable support. If a “donor” suggests or requests specific actions in exchange for their funds, it probably won’t qualify as a charitable gift. Gifts given for commercial purposes, for instance, do not qualify as tax-exempt donations. This could include a promotion, event or program access, or referrals. Their intent may be charitable, but their execution disqualifies them from receiving any charitable deduction benefits for their gift.
The same rules also apply for in-kind donations. However, the good news is that most businesses that donate goods or services are not expecting any charitable deduction benefits. Their “benefit” in terms of their taxes is realized in their cost of goods sold. If you receive goods or services for free from a business (not an individual), it can be a donation or exchange for sponsorship benefits. Either way, no charitable tax receipt is necessary (although some documentation and gratitude are highly recommended).
|The business or individual has the potential to realize promotional or fiscal benefits. This may keep them loyal and engaged.||Sponsorship is usually tied to an event or program that has production value and requires a significant investment of time and energy.|
|The quid-pro-quo nature of these relationships may make them easier to manage and navigate.||Sponsors may have unrealistic expectations or demands related to how their brand is promoted.|
|Record keeping for the nonprofit is less intensive.||Sometimes a sponsor’s wallet is driving decisions more than their heart for your mission.|
|The public nature of sponsorships thus attracts more supporters.||Sponsor relationships are usually created and maintained by individuals, so they require intentional effort.|
|There are typically no expectations or demands made with a charitable donation. However, a donor may want to be informed about a program.||Donor retention is one of the greatest challenges facing nonprofits. After all, it’s on you/your team to maintain the relationship.|
|A charitable donation is usually a signifier that someone is endeared to your mission and believes in your work.||Record keeping for donations is stringent and has tighter controls than with sponsorship.|
|There are many ways someone can make a charitable gift to your organization with or without meeting a member of your team.|
|The donor’s gift may be tax deductible. Of course, this is subject to tax laws at the time of the gift and the donor’s personal financial situation. Therefore, if they do not itemize their taxes, they may not receive much (any) benefit.|
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