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Are sponsorships restricted funding?

  • 1.  Are sponsorships restricted funding?

    Posted 11-29-2022 10:57 AM
    Hi all,

    I'm hoping this group can help me understand and translate between fundraising best practices and accounting rules. Currently, my organization treats event sponsorships as IRS-definition "restricted funding" because it is conditioned upon the completion of a task, and the donor/sponsor could theoretically ask for their money back if the event doesn't happen. Therefore, event sponsorships go on the restricted funding schedule and are not released until the event occurs. 

    I'm currently trying to formalize our allocation structure in our grant and donation management database (Salesforce), to streamline and automate the identification of restricted funds (GAU Allocations for those familiar with Salesforce). This will be a list of all our programs and Development staff can select from the menu and identify the percentage intended for each program. To date our process has just been exporting data onto a spreadsheet and allocating it there. What I want to do is to empower Development staff to identify the program(s) that the funds are restricted to upfront, so what grants/donations are allocated where is more transparent and accessible, and administrative burdens are reduced for things like campaigns where currently we have to identify the program allocation by hand in the spreadsheet for all donations. 

    It doesn't feel like event sponsorships fit in this list. I don't want Development staff to be identifying a grant or a donation as "event sponsorship" instead of "For XYZ Program" or "For General Operating Support." Can anyone help me understand if identifying sponsorships as restricted funding is standard, or if there is another way to handle event sponsorships so we can confirm the event occurs, but not conflate it with Programmatic support? Would appreciate knowing how other folks handle this.

    Thanks!

    ------------------------------
    Leslie Proudfoot
    Director, Philanthropy Operations
    GRID Alternatives
    lproudfoot@gridalternatives.org
    ------------------------------


  • 2.  RE: Are sponsorships restricted funding?

    Posted 11-29-2022 11:56 AM
    Your accounting office misunderstands the nature of charity sponsorships.  I've not seen this narrow of an interpretation before.  Furthermore, it is unusual to refund a sponsorship as even if the event is canceled at the last minute, the sponsor has already received the promised name recognition.

    In all instances, except when the sponsorship results in advertising, the payment is regarded as tax-deductible, less tangible benefits.  The receipt is issued at the time of the payment.  Meaning, at that time, the money is yours.  It is not subject to being returned.  If the activity is canceled or rescheduled, the sponsor should be given an option for alternate use of the gift - just as you would an individual if the program they gave to was ultimately dropped.

    John

    John H. Taylor
    Principal
    John H. Taylor Consulting, LLC
    2604 Sevier St.
    Durham, NC   27705
    919.816.5903 (cell/text)

    Serving the Advancement Community Since 1987






  • 3.  RE: Are sponsorships restricted funding?

    Posted 11-29-2022 12:19 PM
    Thank you! I will take this response back to them and see if we can change that practice.
    ~Leslie

    ------------------------------
    Leslie Proudfoot
    Director, Philanthropy Operations
    GRID Alternatives
    lproudfoot@gridalternatives.org
    ------------------------------



  • 4.  RE: Are sponsorships restricted funding?

    Posted 11-29-2022 05:33 PM
    A qualified sponsorship payment is definitionally not a charitable donation, and is exempt from rules governing corporate charitable donations, e.g. the 10% of taxable income limit. Since it's not a donation, it's not restricted, either. 


    Thank you,
    Isaac Shalev
    Data Strategy Expert
    Sage70, Inc.
    (917) 859-0151
    isaac@sage70.com

    Schedule a 30-minute consultation now:






  • 5.  RE: Are sponsorships restricted funding?

    Posted 11-29-2022 06:12 PM
    Sponsorship payments can definitely be deductible.  Here's a good explanation from The Tax Advisor:

    Tax Treatment to Sponsoring Corporation

    By partnering with tax-exempt organizations, for-profit corporations may gain access to a valuable marketing opportunity, allowing them to reach target audiences while supporting the important efforts of tax-exempt entities. Depending on the particular facts, a corporate sponsorship payment may be deductible under Sec. 162 as an ordinary and necessary business expense or under Sec. 170 as a charitable contribution. According to Regs. Sec. 1.513-4(e)(3), the fact that a payment is a qualified sponsorship payment treated as a contribution to the payee organization does not determine whether the payment is deductible by the payer under Sec. 162 or Sec. 170.

    Deduction as a charitable contribution requires an intent to make a gift. A corporation's expectation of a return benefit may suggest a lack of gratuitous intent and could disqualify the deduction under Sec. 170. Deduction as a business expense requires that the payment must be an ordinary and necessary expense of carrying on the taxpayer's trade or business. Regs. Sec. 1.162-20(a)(2) provides that expenditures for institutional or goodwill advertising, which keep the taxpayer's name before the public, generally are deductible as ordinary and necessary business expenses if the expenditures are related to the patronage the taxpayer might reasonably expect in the future.

    If a payment appears potentially eligible for deduction under either provision, the corporation may be able to evaluate which provision affords it the greatest tax savings. When making this determination, corporations should take into consideration the limits on charitable contributions. Corporate charitable contribution deductions are limited to 10% of taxable income (as computed under Sec. 170(b) (2)(C)).

    John H. Taylor
    Principal
    John H. Taylor Consulting, LLC
    2604 Sevier St.
    Durham, NC   27705
    919.816.5903 (cell/text)

    Serving the Advancement Community Since 1987







  • 6.  RE: Are sponsorships restricted funding?

    Posted 11-29-2022 10:47 PM
    Right - many things are deductible, not all are charitable donations. And vice versa - charitable donations can be nondeductible in some circumstances for some taxpayers. From a nonprofit accounting standpoint, a QSP is contribution income, but is not restricted. The revenue should be recognized when the sponsorship agreement is signed.


    Thank you,
    Isaac Shalev
    Data Strategy Expert
    Sage70, Inc.
    (917) 859-0151
    isaac@sage70.com

    Schedule a 30-minute consultation now:







  • 7.  RE: Are sponsorships restricted funding?

    Posted 11-30-2022 04:18 PM

    Not sure if I understand the question fully. But here, event funds are pooled into operating accounts from which event staff pay event bills. After all the chips settle, they submit a request to journal the net remaining to the gift designations being supported by that event.

     

     

    Aaron Forrest CPA

    Senior Director Gift and Donor Services

    University of Rochester Office of Advancement

    585.275.2799 | aaron.forrest@rochester.edu

     






  • 8.  RE: Are sponsorships restricted funding?

    Posted 12-02-2022 10:20 AM
    That is a system that makes a lot of sense, Aaron! Thanks for sharing.

    ------------------------------
    Leslie Proudfoot
    Director, Philanthropy Operations
    GRID Alternatives
    lproudfoot@gridalternatives.org
    ------------------------------