Small businesses have an integral relationship with the communities they serve. Community members often rely on the products and services the small businesses provide, and in return, the businesses offer employment opportunities to local residents as well as increased tax dollars for the local economy.
Because of their unique position within local communities, small businesses rely on the well-being of the local economy. Their longevity and financial stability depend on a thriving and supportive community. Today’s consumers are increasingly concerned about the nature of the businesses they support, choosing to do business with companies large and small that demonstrate a concern for the well-being of community members, the environment, or other important social issues. This makes it important for small businesses to engage with their communities in ways that go beyond sales, to be involved in ways their customers find commendable.
Sponsorship as Business Strategy
One of the most effective ways for a small business to incorporate social responsibility into their daily operations is through nonprofit sponsorship. Sponsorship is the material support of an organization by an unrelated partner. Sponsorship is not an act of charity; it is a business arrangement designed to benefit everyone involved.
Although often linked to large corporations in the media, in practice small business sponsorship is a common and effective business strategy. Sponsorship offers a wide range of benefits for business owners, nonprofit organizations, and the community as a whole. For example, sponsorship can raise brand awareness and generate new customers for the sponsor. Sponsorship can help raise awareness for a nonprofit organization, supporting other fundraising efforts. Sponsorship can also encourage businesses and community organizations to build solid relationships, which can result in both tangible and intangible benefits for both the sponsor and the organization.
The Tax Benefits of Sponsorship
There are many benefits to small business sponsorship. But perhaps one of the most important benefits of sponsorship for business owners is when it is used as part of an effective tax management strategy. The IRS allows businesses to take a tax deduction for qualified sponsorship payments. This deduction is in addition to and different from other deductions allowed for regular business expenses. Most business tax deductions are payments made as a necessary part of doing business. But for tax purposes, entering into a sponsorship partnership requires meeting a few extra requirements before a deduction can be taken.
The IRS defines a qualified sponsorship payment as one for which the sponsor receives nothing in return other than acknowledgment by the organization. This acknowledgment may include things like placing the sponsor’s name or logo on signs, hats, or jerseys, providing contact information about the sponsor, and even a general description of the company’s products or services.
Under these guidelines, a small business sponsorship might function more like an exchange in which there are financial benefits for both the business and the sponsored organization, but not in the same way that advertising produces more customers. Rather, in a sponsorship situation, the business might contribute to a charity event, for example, in exchange for the business name and logo being prominently displayed in front of the attendees. In this way, the business provides tax-exempt income for the nonprofit organization, garners goodwill from the community, and also increases brand visibility. All of these can indirectly boost a small business’s bottom line.
At the same time, however, it is the available tax deduction that can turn a charitable contribution into a direct financial business gain. By planning for a sponsorship payment deduction, a small business can help minimize taxable income in ways that ordinary business expense deductions cannot. In this way, sponsoring a nonprofit organization supports the long-term financial and social growth of small businesses.