Sponsorship vs. Donations

by Kay Tang

Undertaken by corporations to achieve commercial objectives, a sponsorship is a business transaction. In contrast, a donation is a charitable gift and given for philanthropic reasons. Many nonprofit organizations rely on a combination of sponsorships and donations for a wide range of resources, including cash, space, equipment, transportation, lodging, utilities and telecommunications software and hardware.

Purpose

Sponsors pay a fee to own the rights to the commercial potential relating to an event or an charitable organization. They aim to create a link in the minds of target audiences between the charitable organization and their own brands, products and services. The sponsorship provides exposure or recognition in a desired context, and can serve to increase customer awareness and sales. For example, the sponsorship of a cultural event can lend credibility and prestige to a corporation. A donation is given for the good of a cause or event without the expectation of a return.

Attributes

Because a sponsorship revolves around the active promotion of an charitable organization’s image or products, the sponsorship fee typically comes from the marketing or communications department. The relationship between the charitable organization and the sponsor is nurtured over time and may include the involvement of employees in the nonprofit’s operations and opportunities to network. Although donations may enhance an sponsoring organization's image in the eyes of stakeholders, they usually do not serve to raise a company’s profile. Some wealthy individuals and companies even make anonymous contributions and are thanked by charitable organizations in discreet ways. Donation funds come from the sponsoring company’s philanthropic arm or foundation and are usually cause-related.

Taxation Issues

The taxation of sponsorship fees under Internal Revenue Service rules can be tricky. If a nonprofit provides advertising or services as part of the sponsorship agreement, the sponsorship fee may be subject to unrelated business income tax, according to Peri Pakroo’s 2011 “Starting & Building a Nonprofit: A Practical Guide.” When a nonprofit only acknowledges its sponsor, the sponsorship fee is not subject to taxation. Since the distinction between advertising and acknowledgement is unclear, consultation with an accountant or lawyer is advisable. If contributors receive gifts, such as recordings of events, tickets, memorabilia or passes to after-show parties, valued at more than $75 from a nonprofit, they can only deduct the difference between the gift premiums and donations on their tax returns. Nonprofits are required to give donors a statement of the fair market value of the gift premium.

Product Donations

Companies often donate products to nonprofits, ranging from costumes to bottled water. If the donation increases the public’s awareness of the product and boosts sales, the donation becomes a business transaction. Product donations are typically approved by the company’s marketing department and can be deducted as a business expense. A nonprofit treats the donation of product as an in-kind sponsorship. If the donation of product serves a community event, such as a case of bottled water given to a children’s baseball team, the donation is treated as an in-kind contribution.

References

About the Author

Kay Tang is a journalist who has been writing since 1990. She previously covered developments in theater for the "Dramatists Guild Quarterly." Tang graduated with a Bachelor of Arts in economics and political science from Yale University and completed a Master of Professional Studies in interactive telecommunications at New York University.

Photo Credits

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