Working with businesses: sponsorships, matching gifts and more

This guide is for small charities that want support from local businesses or larger companies but aren't sure how to ask or what to offer in return. Business support comes in several forms, and each has its own rules. After reading, you'll know the difference between a donation and a sponsorship, how to tap employee matching gifts and volunteer grants, and where the IRS draws the line between thanking a sponsor and running an advert for them.

Four common kinds of business support

1. A straight donation

A business gives money or goods because it believes in your work, and expects nothing in return beyond a thank-you. Treat it like any other gift. If it's $250 or more, send the same written acknowledgment you'd send any donor, saying what you received and that nothing was given in return.

2. A sponsorship

A business pays you and, in return, you show its name or logo, often at an event or on a program. Sponsorships are very common. They're usually fine, but there are tax rules about what you can say. See below.

3. Employee matching gifts

Many companies match donations their employees make to charities. If an employee gives your charity $100, the company may give another $100. Each company sets its own rules: which charities qualify, the minimum and maximum amounts, and deadlines for submitting a match request.

The employee usually starts the process through their employer's giving program. Then the company may ask your charity to confirm the gift.

4. Volunteer grants

Some companies give money to charities where their employees volunteer, often after a set number of hours. These are sometimes called "dollars for doers." Again, the employee usually applies through the company.

How to find business partners

• Start local. Banks, credit unions, grocery stores, car dealers, insurance agents and utility companies often support their communities.
• Look at who already shows up. Which businesses sponsor youth sports or school events near you?
• Use your board. Ask where each board member works, banks and shops. A personal introduction matters.
• Look up larger companies' giving programs. Many have a foundation or a community giving page explaining what they fund and how to apply.

When you approach a business, think about what they care about. Many want to be seen helping the local community, to give employees a chance to volunteer, or to support causes linked to their work. Show how a partnership helps both sides.

Sponsorship versus advertising: the tax line

Here's where many charities trip up without knowing it.

A 501(c)(3) charity normally doesn't pay income tax. But if it earns money from a business activity that isn't related to its mission, that income can be taxed. This is called unrelated business income tax, or UBIT. Our guide on earned income explains it.

Selling advertising can be that kind of business. But the tax law has a safe harbor for sponsorships, called a qualified sponsorship payment.

According to IRS Publication 598, a qualified sponsorship payment is a payment from a business for which the business gets no substantial benefit other than the use or acknowledgment of its name, logo or product lines in connection with your activities. Qualified sponsorship payments are not subject to unrelated business income tax.

What counts as acknowledgment (usually fine)

The IRS regulation on sponsorships (26 CFR 1.513-4) and Publication 598 give these examples:

• The sponsor's name and logo
• Its established slogans that are part of its identity
• Its address, phone number and website
• A neutral description of its products or services
• Displaying or handing out the sponsor's product at a sponsored event

Example wording: "Thank you to Riverside Hardware, 12 Main Street, for sponsoring our spring cleanup." (Riverside Hardware is a made-up name.)

What counts as advertising (may be taxable)

Publication 598 says advertising includes:

• messages with qualitative or comparative language ("the best hardware store in town"),
• price information or other signs of savings or value ("20% off this week"),
• endorsements ("we recommend…"), and
• inducements to buy, sell or use the products or services ("visit today!").

If one payment gets the sponsor both acknowledgment and some advertising, only the part above the fair market value of the advertising is a qualified sponsorship payment.

Other limits

• Payments tied to attendance or exposure. A payment isn't a qualified sponsorship payment if the amount depends on how many people attend or similar measures of exposure. It can depend on the event actually happening.
• Periodicals. Acknowledgments in a regular publication such as a monthly newsletter or magazine don't qualify. Programs and brochures handed out at a specific event are different and can qualify.
• Perks for the sponsor. Free tickets, a reception or similar benefits are treated as a separate exchange. Under the regulation, benefits are ignored if their total fair market value is not more than 2% of the payment. Say a business pays $1,000 and gets tickets worth $85: that's more than $20 (2% of $1,000), so only the part of the payment above the value of the benefits counts as a qualified sponsorship payment.

Tickets for sponsors

If a sponsor pays more than $75 and gets event tickets in return, the quid pro quo rules apply: you must tell them in writing how much of the payment is deductible as a gift. Our guide on fundraising events explains this.

Put it in writing

For any sponsorship, write a short agreement, even a one-page letter, that says:

• how much the sponsor will pay and when,
• exactly how you'll recognize them (where the logo goes, what words are used),
• any tickets or other benefits they get,
• how they can and can't use your name and logo, and
• what happens if the event is canceled.

This protects both sides and keeps you clearly on the "acknowledgment" side of the line.

Protect your reputation

Partner with businesses whose values fit yours. A charity serving children should think carefully before accepting a sponsor whose products aren't suitable for children. Agree on a simple policy, approved by your board, about which businesses you will and won't accept money from. It's much easier to decide this before an awkward offer arrives.

Business partnership checklist

• Our thank-you notes ask donors about matching gifts
• Each sponsorship has a short written agreement
• Sponsor recognition sticks to name, logo, contact details and neutral descriptions
• No prices, comparisons, endorsements or "buy now" messages for sponsors
• Sponsors who get tickets receive the quid pro quo disclosure when it applies
• Our board approved a simple policy on which businesses we accept support from

If you want help writing your first sponsorship letter, ask a member charity for help through the Exchange.