We are working with a nonprofit that has a sponsorship agreement with a vendor that identifies the vendor as the association's “official vendor sponsor.” The contract does not require them to purchase only this vendor's products, but there is an unwritten agreement to purchase only this vendor's products when available in the area. We are concerned that this is an exclusive provider contract, which would mean that the sponsor is receiving substantial return benefit and the total payment will not be considered a qualified sponsorship. What do you think?
I agree with you. The sponsorship regulations provide that a sponsorship is considered entirely a contribution only if the sponsor does not receive a substantial return benefit. Acknowledgments, use of logos, naming rights, designation as sole sponsor, and other similar benefits that are not advertising do not taint the situation and the payments can still be fully treated as contributions. But a substantial return benefit, like an agreement to sell only the sponsor’s products at the nonprofit’s events, requires that the fair value of that benefit must be deducted from the payment in order to determine the amount that can be treated as a contribution. The commitment of the nonprofit to buy the sponsor’s product wherever it is available certainly seems like an economic benefit to the sponsor and only the amount of the sponsorship payment that the sponsor can show exceeds the value of the exclusive purchase agreement would be considered a contribution. The fact that the agreement is not in writing is not determinative; the existence of the agreement is what is determinative. (See Ready Reference Page: “IRS Finalizes Regs Covering Sponsorships”)
It also sounds like the receipt of the payment in this situation could create unrelated business taxable income for the nonprofit. If this agreement is not limited to a specific event or short series of events, the activity may well be considered to be “regularly carried on” and convert the value to unrelated business taxable income. (See Ready Reference Page: “Nonprofits Often Worry About UBIT”)
For more information on sponsorships consider this text;
Made Possible By: Succeeding with Sponsorship
By Patricia Martin
Made Possible By is a step-by-step guide to securing successful, sustainable corporate sponsorships that will provide financial stability, increased visibility, and help your nonprofit achieve its mission. Sponsorship expert Patricia Martin walks you through every phase of the process and shows how to assess what it will take to get your organization prepared for success.