Sponsorship and advertising can appear quite similar, and they both may have an important role in your business’s marketing strategy. The Internal Revenue Service defines each differently, however, understanding the IRS’ different definitions can help businesses and nonprofits when filing taxes.
Official IRS Definitions of Advertising and Sponsorship
The IRS defines both advertising and sponsorship in IRS Reg. §1.513-4(c)(2)(iv-v). This is the most pertinent part of the tax code for understanding what each is, even though sponsorship deductions are taken as an IRC §162 deduction.
What is Advertising?
The IRS positively defines advertising as any messaging or material that promotes a business (or service, product, facility, or trade) in one of the following ways:
● Uses qualitative comparison language
● Indicates savings or otherwise uses pricing information
● Constitutes an official endorsement of the business
● Induces people to conduct commerce with the business
Conducting commerce may include purchasing, selling, or using a service, product, or facility.
Should any of these be present in a business’ messaging or material, the marketing should be classified as advertising for taxation purposes. Any element of advertising makes the entire message advertising.
What is Sponsorship?
The IRS defines sponsorship as any payment for which the business (or trade) has no expectation of return benefit, and for which there isn’t any formal arrangement to provide a return benefit. A return benefit could be any of the aforementioned advertising criteria or some other quid-pro-quo.
Importantly, acknowledgment isn’t considered a return benefit. Acknowledgments are specifically allowed per IRS Reg. §1.513-4(c)(2)(iv), which outlines different types of acknowledgments that are allowed. Acknowledgments can include:
● Exclusive sponsorship arrangements
● Using a business’ name, tagline and logo
● Sharing a business’ website, address or phone number
● Generally describing a business’ product or service line
● Visually depicting a business’ products or services
● Displaying or distributing a business’ products
Equally importantly, the tax code also outlines specific details that can’t qualify as sponsorships. A sponsorship can’t include the following:
● Exclusive provider arrangements
● Provisioning the sponsoring business with goods, services, facilities, or privileges
● The sponsoring business using the sponsored’s logo, tagline, trademark, or patent
● Paying sponsors with contingencies that require exposure/marketing
● Periodicals or other regularly repeated actions
● Income for the sponsoring business
Tax Implications of Sponsorship Advertisement
The IRS so carefully defines sponsorships and advertisements because they’re treated differently by the federal tax code.
Is Advertising Tax-Deductible (for Advertiser) and Taxable (for Publisher)?
Advertising is viewed as a business expense, in which the advertiser pays the publisher for specific services (return benefits). Like most other business-to-business payments for service:
● Advertising is tax-deductible as a business expense (for advertisers)
● Advertising is subject to business income tax (for publishers)
Publishers must pay business income tax on any advertising revenues, regardless of whether the publisher is a nonprofit organization or other entity.
Is Sponsorship Tax-Deductible (for Sponsor) and Taxable (for Nonprofit)?
Sponsorships to nonprofit organizations are given special treatment under the tax code. The IRS uniquely treats these as a business expense, but not a business income. For qualifying sponsorships:
● Sponsorship is tax-deductible as a business expense (for sponsoring businesses)
● Sponsorship isn’t subject to business income tax (for sponsored organizations)
This has obvious benefits for nonprofits, and businesses should be aware of the benefit. Marketing that’s crafted to meet sponsorship criteria can still reduce a business’ tax burden, but not increase a nonprofit’s.
Strategically Manage Your Sponsorship Taxes
If your business or organization takes advantage of this special treatment for sponsorships, let us at Gurian CPA Firm help with your tax reporting. We’ll make sure the sponsorships are properly reported, so you can keep your business’s or organization’s tax burden as low as possible.
