Nonprofit Sponsorship Versus Advertising
As a nonprofit, you need funding to do the important work you do in the community. While there are grants available to many nonprofits, another common source of funding is corporate sponsorships from companies of all sizes. Many companies want to give back to the community and support nonprofits, but it’s also an opportunity for brand exposure for the company.
It’s good for companies to give back to the community and be socially responsible. But it comes with some caveats, and every nonprofit organization needs to know the difference between sponsorship and advertising.
So how exactly do you distinguish between sponsorship and advertising, and more importantly, why does it matter?
The fundamental difference
A sponsorship is when a for-profit company gives your nonprofit money, goods, or services in return for a mention of their name as a sponsor. Pretty simple.
Advertising also involves a for-profit company giving your nonprofit money, goods, or services in return for a mention of their name, but advertising comes with a call to action as well. The IRS is pretty strict on this: Anything that can be construed as telling people what the organization does or encouraging people to shop with that company makes it advertising and not sponsorship. And that means the income from that is subject to certain rules and restrictions.
Your best approach as a nonprofit that wants to accept sponsorships and not venture into advertising is to simply list each organization’s name or logo as a sponsor and nothing more. Don’t mention what they do or what they provided for your event — only mention their name.
“Your best approach as a nonprofit that wants to accept sponsorships and not venture into advertising is to simply list each organization’s name or logo as a sponsor and nothing more. ”
Is accepting advertising funds worth it?
A nonprofit can take money and advertise for a for-profit business, but they have to report that income correctly. It goes under “unrelated business income” and is taxable, which requires some nuanced reporting on a Form 990.
In addition, only 33% of your income can be through advertising, so there’s both a limit and a reporting requirement. You need good records, plus you need a great CPA who values open and honest communication.
For most smaller nonprofits, advertising is more trouble than it’s worth, and they should stick to sponsorships. The few exceptions tend to be nonprofits that deal in media, which has a natural crossover.
If you’re going to pursue advertising income, you need an attorney who specializes in nonprofit law to write your advertising policy and any associated documents, such as the letter that identifies what the company receives in exchange for the advertisement and how much of it is deductible on their taxes. If they receive some benefit in goods and services, the fair market value of the advertising is deducted from the amount they can write off.
Sponsorship versus advertising can quickly become a huge headache for nonprofits that aren’t aware of the difference between the two. Make sure your staff and your board all know the difference to start with. Then, if you want to pursue advertising dollars, consult with your CPA and a qualified attorney first to make sure you have everything set up correctly.
