If you’re sponsoring youth sports leagues, youth groups, or other events, you may be eligible for a tax deduction.
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This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.
This post is mainly about business sponsorships. If an organization you want to support puts out a call for sponsorships and you want to make a donation, it’s usually just that — a donation.
Personal donations generally fall under the charitable contribution rules.
For example, your child’s baseball league puts out a call for team sponsors at $500 each. Teams are usually sponsored by businesses, but you decide to write a personal check. Assuming the league is a qualified non-profit organization, you could usually include $500 in your itemized deductions as a charitable contribution.
Businesses have two potential ways they can deduct a sponsorship payment.
If they’re getting something in return, usually advertising, the sponsorship payment will generally be a business expense. The sponsorship is effectively the same as if a business went out and bought ad space that was listed for sale.
If a business isn’t getting anything in return, qualified sponsorship payments can be considered a charitable contribution.
Deducting Charitable Contributions as a Business
If you have a pass-through business such as a sole proprietorship, S-corporation, and many LLCs, you generally don’t include business charitable contributions on your business tax return. Instead, they go in your personal itemized deductions.
If you’re a C-corporation or LLC taxed as a C-corporation, you can take a tax deduction for qualified corporate sponsorship payments on your business tax return. The limit is generally 25% of your taxable income.
Just like with personal charitable contributions, business charitable contributions generally need to be made to qualified tax-exempt organizations to get a tax deduction.
Advertising Sponsorships of a For-Profit Organization
If you’re sponsoring a for-profit organization such as a professional sports team, things are usually fairly simple. Your corporate sponsorship payment is typically an advertising expense to you and taxable advertising income to the organization you’re sponsoring.
One thing to watch out for is if you’re getting something like event tickets in return. Sports season tickets, concert tickets, or similar benefits would generally fall under entertainment. Entertainment expenses are usually not deductible since 2018.
For example, let’s say your sponsorship of a minor league baseball team got you an advertising banner plus ten season tickets. You’d typically have to deduct the face value of the season tickets from your sponsorship payment to determine what you could deduct.
Advertising Sponsorships of a Non-Profit Organization
When you make a sponsorship that’s considered an advertising expense rather than a donation, the tax rules are generally the same on your end. You can deduct the cost as a business expense subject to limitations, such as if you receive an entertainment benefit in return.
The potential issue for the non-profit is the unrelated business income tax (UBIT). Even when you’re dealing with a tax-exempt organization, they may have to pay taxes on a sponsorship payment in situations where you’re getting something in value in exchange for your sponsorship.
The unrelated business income tax applies when an organization receives income outside of its usual business. For example, in a youth sports league, the player registration fees are the league’s “business income.” Other sources of income, such as sponsorship payments and concession sales, are generally unrelated income.
Is all unrelated business income subject to tax?
Not all unrelated business income will be subject to unrelated business income taxes. For example, a youth group’s concession sales are usually exempt because they’re operated with volunteer labor.
Sponsorships generally don’t fall under any exemptions to unrelated business income tax. Instead, you have to figure out if it’s unrelated business income or a qualified sponsorship payment.
The main deciding factor is whether you receive a substantial return benefit. If you do, the organization is subject to UBIT. If you don’t, they can generally count it as a donation they don’t have to pay taxes on.
Like other parts of the tax code, this determination can get very messy.
What is a substantial return benefit?
A substantial return benefit is when the corporate sponsor gets something in return for sponsorship payments that are more than a mere thank you.
Things that can make your sponsorship taxable to an exempt organization include:
Being an exclusive sponsor or provider
Providing incentives for buying a sponsor’s products or services
Promoting products and services in sponsorship messaging
Receiving advertising space, services, or other benefits the sponsored organization usually charges for
Things that generally won’t make a sponsorship payment taxable include:
General mentions of your sponsorship on the organization’s website
Limited visual displays that don’t have substantial advertising value
Distributing free samples without giving an endorsement
Again, the problem becomes where to draw the line. When a youth baseball league puts sponsor banners on the outfield fence, is that a substantial return benefit?
A lot of charitable organizations aren’t counting this as unrelated business income. Maybe more should be. Those that are actually aware of these rules probably prefer that you make a qualified sponsorship payment to avoid taxes.
Either way, it’s usually going to be tax deductible for your trade or business. However, you should be aware that depending on your entire situations, there are times when one way or the other may get you a larger deduction.
What if I sponsor an individual athlete?
If you want to sponsor an individual athlete, the rules are different than they are for organizations.
Donations have to be to qualified non-profit organizations. You can’t just give sponsorship dollars to an individual athlete and write it off as a donation, even if they’re an amateur athlete going to the Olympics.
If this is something you want to support while getting the charitable donation deduction, you may be able to donate to a scholarship fund or some other non-profit organization that supports athletes.
Another potential option to support an athlete is if you hire them for something like a Name, Image, and Likeness deal. If they’re providing services to you, such as appearing in advertisements or making appearances at your business, you can generally deduct reasonable compensation for the services the athlete provides.
Of course, you’d also usually need to issue the athlete a 1099 just like any other contractor doing work for you.
- IRS Publication 598 Tax on Unrelated Business Income in Exempt Organizations
- IRS: Advertising or Qualified Sponsorship Payment?