If you’ve heard that sponsorships are an effective way to support a community group or event or expose your name to more members of the community, you may wonder are sponsorships tax-deductible. Here are a few things to consider to help you decide if your sponsorship qualifies as a tax deduction.
One of the rules that the IRS uses to determine if a sponsorship qualifies as a deduction is whether you receive advertising in exchange for the sponsorship.
It’s fine for the entity that receives the sponsorship money to recognize your company for your donation, but they may not advertise your product or service.
For example, if you sponsor an event, and the organization puts your company’s name on its printed materials or supplies a link to your webpage (that goes to your homepage, not a product or services page), this qualifies as acknowledgment.
However, if the organization links to a webpage that offers info about your company’s products or appears to endorse your product, this is considered advertising. Your sponsorship won’t be tax-deductible, and the organization would need to claim your donation as income.
The activities that an organization completes in exchange for a sponsorship payment will impact if it’s an eligible tax deduction. You can’t offer advertising opportunities for a sponsorship, or it’s considered a taxable payment instead of a sponsorship.
An organization can’t regularly reference the company making the sponsorship in materials that have a regular release schedule, like a company newsletter or bulletin. They cannot endorse or promote the company or its offerings in any way.
It’s not permitted to give a sponsorship preferential treatment or offer exclusivity. Sponsorship opportunities may not be limited to exclude other companies.
Some sponsorship packages are actually designed to be an advertising opportunity. For example, if a sponsorship package includes an ad in one of the company’s publications, this means that some of the cost of the sponsorship package isn’t tax-deductible and is considered income to the organization.
This doesn’t mean that you can’t deduct any of the sponsorship. Instead, the portion that’s equivalent to the fair market value of the ad would not be tax-deductible, while the remaining amount is an eligible tax deduction.
If you have additional questions about are sponsorships tax-deductible, contact us today to explore their impact on your tax obligation.
