Any sponsorship money that you receive that is at least $600 or more is considered taxable income. You will need to claim this income on your tax return just as you’re required to report other sources of income. Depending on the manner in which the funds were distributed to you and how the funds were used determines the tax category of the income.
Nonprofit organizations are tax-exempt entities, and the profits used to promote the purpose of the business are non-taxable. Common types of nonprofit organizations are charitable organizations, political organizations, social welfare organizations and business leagues. However, they often receive income from corporate sponsors, and the sponsorship money may be taxable depending on its purpose and how the money will be used by the nonprofit organization. If the sponsorship money is used for reasons that do not substantially relate to the overall mission of the nonprofit organization, it should be reported as taxable unrelated business income.
Qualified Sponsorship Payment
Unrelated business income derived by a nonprofit organization through sponsorship funds may be treated as nontaxable contributions, if it meets the requirements of a “qualified sponsorship payment.” A qualified sponsorship payment is sponsorship money given to a tax-exempt organization, but the sponsor receives no benefit in exchange for the payment other than displaying the company’s name or logo. However, if the tax-exempt organization advertises the sponsor’s business or endorses the products, the income may be taxed as unrelated business income.
You may receive sponsorship money from companies to participate in an event or fundraiser. For instance, some musicians and professional athletes receive sponsorship money from corporations, national organizations and sports organizations. Endorsement income and bonuses are usually offered to entertainers and athletes in exchange for using or wearing the company’s name or products and promoting the products or services of a company during a performance or athletic event. These funds must be claimed as taxable income on your federal tax return.
Depending on the contract between the sponsor and the recipient, the money can be considered as derived from different sources and categorized under various types of income. Sponsorship income that you receive as a result of a performance or demonstration can be reported as royalties. Bonuses, award funds and incentive income are considered personal service income. Other types of sponsorship funds may be reported as other income or miscellaneous income on your tax return.
Marie Huntington has been a legal and business writer since 2002 with articles appearing on various websites. She also provides travel-related content online and holds a Juris Doctor from Thomas Cooley Law School.