Sponsorships vs. Advertising: Why the Distinction Matters for Nonprofits
When a local restaurant offers to donate a portion of its weekend sales to your nonprofit, it may seem like a generous sponsorship opportunity. However, if your organization encourages the public to attend the event or shop at the business, you may have crossed the line from a qualified sponsorship payment into advertising revenue. That distinction carries real tax implications.
The IRS has issued clear guidance on this issue, yet many nonprofits remain unaware of the distinction. Understanding how these rules apply can help your organization avoid unexpected tax liability and stay compliant with federal regulations.
The key difference is the call to action
Under IRS Treasury Regulation 1.513-4(b), a qualified sponsorship payment is a contribution made by a for-profit business in exchange for recognition, not promotion. Your nonprofit can thank a business by displaying its name, logo, or tagline on event materials, but you cannot include a call to action. For example:
• You may say, “Thank you to XYZ Pizza for supporting our annual fun run.”
• You may not say: “Visit XYZ Pizza on Tuesday to support our nonprofit.”
Even subtle language, such as “Shop local at XYZ Pizza this weekend,” may be considered advertising. If your nonprofit encourages people to take action in support of the business, the IRS may view the payment as a substantial return benefit. In that case, it becomes unrelated business income for the nonprofit, rather than a charitable contribution.
You can view the full IRS guidance here.
Taxable income and reporting obligations
If your nonprofit receives income from advertising, that income is subject to Unrelated Business Income Tax (UBIT), and you will need to file a Form 990-T. You may also owe taxes on the revenue, unless you can offset it with related expenses.
In the restaurant fundraiser example, if your nonprofit promotes the event and receives a percentage of sales, that income is considered advertising revenue, not a tax-exempt donation. You cannot issue a charitable acknowledgment letter for that amount, and it must be properly reported.
Common practices do not guarantee compliance
It’s easy to assume that if other nonprofits are promoting give-back nights or share-a-sale fundraisers, the practice must be allowed. But just because others are doing it doesn’t mean it’s compliant or that they’re handling the reporting correctly.
This issue has been in the tax code for years, but enforcement has historically been light. That is changing. As regulatory scrutiny increases, nonprofits must take greater care to ensure that fundraising arrangements with for-profit partners are structured and reported properly.
How to protect your organization
The safest path forward is to identify issues early and consult with professionals before finalizing a business partnership. If your nonprofit is collaborating with a for-profit company, we recommend:
• Avoiding any call to action in your recognition materials
• Evaluating whether the for-profit business receives a measurable benefit in return
• Consulting an attorney to structure the agreement properly
In many cases, a sponsorship arrangement can be designed to stay within IRS guidelines. But if the arrangement includes a substantial return benefit, especially if payment is tied to event attendance or sales performance, it may be classified as advertising.
Legal guidance can help you avoid costly missteps
Development staff, executive directors, board members, auditors, and CPAs all play a role in helping nonprofits avoid unintended tax consequences. If you are unsure how a business partnership should be structured, seek legal guidance before moving forward.
If your organization is planning a fundraising partnership or would like to review its sponsorship practices, contact the Nonprofit Solutions Law team. We can help you navigate the rules and ensure that your organization remains compliant.