Issue

We often answer questions from Christian colleges about how a corporate sponsor might be able to handle their sponsorship payments under the Internal Revenue Code.  Is it deductible as an ordinary and necessary business expense or as a charitable contribution?

Situation

Denali Christian College (DCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii).  They are required to file Form 990 annually.  In addition, they file Form 990-T for equipment rentals, periodical advertising, and alternative investment income.

On a conference call to talk about tax issues, DCC’s Controller brings in their Director of Development to ask about a question that one of DCC’s potential corporate sponsors raised.  The potential sponsor wants to know whether their corporate sponsorship payment (for a banner to be placed in the gymnasium) will be considered a charitable contribution by the IRS and thus subject to the “10% limit” on deductibility.

We state that even though DCC will treat a qualified sponsorship payment as a contribution, the sponsor/donor may generally deduct it on their tax return as “promotion”, “advertising”, etc. – an ordinary and necessary business expense.

Rules

From Information Letter 2016-0063

Under § 162(a), taxpayers may deduct ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 1.162-20(a)(2) of the Income Tax Regulations provides, in part, that expenditures for institutional or goodwill advertising which keeps the taxpayer’s name before the public are generally deductible as ordinary and necessary business expenses provided the expenditures are related to the patronage the taxpayer might reasonably expect in the future.

Section 1.170A-2(c)(5) states that transfers of property to an organization described in § 170(c) which bear a direct relationship to the taxpayer’s business and are made with a reasonable expectation of a commensurate financial return may constitute valid expenses of a trade or business, deductible under § 162(a) rather than as charitable contribution or gift under § 170. See Marquis v. Commissioner, 49 T.C. 695 (1968).

Accordingly, a [corporation] making an expenditure for institutional or goodwill advertising to keep the corporation’s name before the public is generally treated as an expense under § 162(a). This rule applies even if the payment is made to a § 501(c)(3) organization.

Bottom Line

This is an area that is often misinterpreted – to the school’s detriment.  Knowing the IRS rules can help your institution obtain more corporate sponsorships – (REO!).  There can be nuances and limitations to these rules. It is best to run your specific situation by your skilled, knowledgeable, and experienced higher education tax advisor.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.