By Christina Cruea, CPA, Senior Accountant at Blue & Co.

Not-for-profit organizations often rely on sponsorships to provide essential funding, expand resources, and increase community engagement. Organizations should be aware of both the accounting and tax implications of entering into a sponsorship agreement to avoid unintended tax or legal consequences.

What is a sponsorship?

A sponsorship is created when an individual or corporation partners alongside a not-for-profit organization and their mission by providing some sort of support (through financial assets, or products or services). Individual sponsorships are most often committed to the development of a product, program, or project and the sponsor does not typically expect anything in return for the sponsorship. Corporate sponsorships are often considered a form of marketing where the business pays for all, or part, of the cost associated with a project in exchange for recognition.

Not-for-profit organizations need to ensure they are accurately classifying agreements with sponsors as either sponsorships or advertising. Typically, not-for-profit organizations attempt to avoid advertising agreements as those agreements are considered unrelated business income (UBI) and subject to taxation. To prevent a sponsorship from crossing over into advertising, a not-for-profit should avoid endorsing the sponsor’s products or services and ensure the return value back to the sponsor is less than two percent of the total sponsorship.

What is the accounting treatment for a sponsorship?

First, a not-for-profit must decide if the sponsorship is considered an exchange or nonexchange transaction.

Exchange Transaction

• An exchange transaction exists when a sponsor expects to receive commensurate value in return for the sponsorship or the benefit the public receives is de minimis.
• Example – A corporation gives money to a local charity to sponsor an event and in return they receive prominent placement of their logo on event materials and the charities website and receive complimentary tickets.

Nonexchange Transaction

• A nonexchange transaction exists when there is no commensurate value received in return for the sponsorship, and there is a public benefit.
• Example – An individual sponsors the creation of a new scholarship at their alma mater and in return the university names a scholarship after them.

Exchange transactions follow Accounting Standards Codification (ASC) 606 for revenue recognition, while nonexchange transactions follow ASC 958 contribution requirement for revenue recognition. The not-for-profit needs to determine the intent of the sponsor. Are they making a donation, or are they giving something in exchange for promotional benefits in return?

The not-for-profit should also consider who has control over the method of delivery of the asset and who decides the amount that is given. It is possible for a sponsorship to be part exchange transaction and part nonexchange transaction. The not-for-profit must identify the amount for each transaction and follow the appropriate accounting guidance.

As not-for-profit organizations continue to look for ways to increase and diversify revenues, it is important to understand the opportunities of sponsorships, but also the requirements for proper accounting and tax treatment. It is critical for not-for-profit organizations to review each sponsorship agreement thoroughly so as to understand all terms and implications of these agreements before execution.

If you need assistance or have questions concerning proper treatment of sponsorship agreements, contact your local Blue & Co. advisor.