Episode 30: When does sponsorship become advertising? Special guest: Jess Birken
Event sponsorship is arguably one of the most challenging and stressful aspects of planning a fundraising event.
Part of that stress is driven by the fact that there are IRS rules about what you can and cannot do and there’s a fine line where sponsorship can unintentionally drift from sponsorship to advertising.
I talk about this and more with my special guest Jess Birken of Birken Law, a Minneapolis law firm that specializes in Nonprofit Law.
In this episode Jess and I discuss:
When does sponsorship become advertising?
What does it mean when that happens? What are the consequences?
How can you prevent this from happening or plan ahead
Jess shares her best tips and advice for creating a win-win value proposition with your event sponsors
For a full transcript, see below.
LINKS & RESOURCES
Alicia’s interview on Jess’s Pocast, Charity Therapy
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Episode 30 Full Transcript
30_When does sponsorship become advertising?
[Alicia: Hello and welcome back to that Sounds Like a Plan. The podcast where we talk about all things related to nonprofit fundraising events. Today's episode is about a topic that I know every single one of you struggles with…event sponsorship, which is why I'm bringing in an expert to talk about it.
[00:00:18] So let's get started..There's a lot to unwrap with event sponsorships. We're gonna dive right in. I'd like to welcome my guest. Jess Birken is the owner of Birken Law Office in Minnesota. She helps nonprofits solve problems so they can quit worrying and get back to what matters most, their mission. In Jess’s spare time, she makes videos, courses, and other materials that empower nonprofits to do things right; using the right tools, making the right connections, and getting the right coaching. It's how we all get stronger. Jess is not like most attorneys. She actually has an outgoing personality and likes to think outside the box. She has a master's in nonprofit management and enjoys teaching and coaching. And Jess and I actually met earlier this year when I was a guest on her podcast called Charity Therapy. I'll give you more information about that episode at the end.
[00:01:18] Jess and I did touch briefly on event sponsorship during that episode, but today we're going to dive a little bit deeper. But first, let's start with a fairly simple background question. Jess, why did you decide to focus your law practice on nonprofit?
[00:01:33] Jess: Well, the, the funny answer is the recession. I graduated from law school in 2007, which means the bottom dropped out of the economy the following year, and there just weren't very many jobs. I was clerking for a judge, and I thought, well, I always wanted to be a trial lawyer, and I really hate trial. I didn't enjoy the courtroom at all when I was clerking for the judge, so I kind of felt like, I am gonna hate this.
[00:02:04] I'm gonna be miserable, there aren't any jobs, so I just doubled down on education in the recession and got a master's in nonprofit management. And you know, life is a winding and weird path,
[00:02:19] Alicia: Yes, it is. So, when you went back for that master's, how did you decide nonprofits? Is there a certain nonprofit that you have always worked with that has been near and dear to your heart, or what led you on that path?
[00:02:31] Jess: Well, you know, I was actually looking at the MBA program. I, I went back to my alma mater for law school, which was Hamlin University, and they have a school of business. And so I was thinking, well, maybe I'll get an MBA. And I saw that they had a Master's in public administration and a master's in nonprofit management.
[00:02:50] And it occurred to me that I have, my entire life always worked or been engaged with nonprofits in some way, and I had never really connected those dots before. Um, I always knew that I wanted to help people. That's why I went to law school. And so I think it just was like, oh, hey, here's a theme in my life.
[00:03:17] Looking back over my, you know, 28, 30 years, at that point I was like, Yeah, let's try this, this, that feels right. And on the first day of the first class, I instantly knew like, oh, these are my people. I'm in the right place.
[00:03:31] Alicia: Oh, I love that. So, we'll dive into the first question. One of the biggest struggles with event sponsorship is getting sponsors, but I actually think it goes to an even bigger issue, which is a lack of understanding of the difference between a sponsor and a donor and how you treat those individuals or entities. How would you describe the difference? And if you were running a nonprofit, how would you treat each of those differently?
[00:03:55] Jess: Well, you know, it kind of depends and I think that one of the issues that comes up here is there's kind of a lot of confusion around whether an event sponsor is a donor or not, right? And so what, what is the value exchange? My fundraising professor, when I got my master's, would always talk about fundraising as a values exchange.
[00:04:23] And so what are we doing when we get an event sponsor? And I think that that can actually be sort of murky. I feel like especially small nonprofits, they know that they should get sponsors because they see other nonprofits that have sponsors and they see silver, gold, platinum, and they, you know, like they, they feel like this is a thing that people do in the nonprofit space.
[00:04:48] So this is what we should do. But I think there's a lot of confusion around what is the sponsorship. Is it advertising or is it a donation? And there are legal rules around that. So, I think if I were running a nonprofit, I would get clear about what my event sponsors are, are they partner organizations? Are they donors?
[00:05:17] Are they people who are really passionate about the mission or is it a little bit more, this is good marketing for us. This gives us a lot of impressions. We wanna be seen as the kind of company that supports charity. Is it trending a little bit more toward advertising? Um, at the end of the day, you wanna have a good relationship with your sponsors regardless.
[00:05:42] But I think just kind of being clear on what is the value exchange is the thing I would focus on first.
[00:05:50] Alicia: You brought up a good point. There are some legal rules around that. We want to be clear here that your participation in this podcast should not be construed as giving legal advice. but is there anything that you can tell us about those legal rules around the exchange?
[00:06:07] Jess: Yeah, so. One of the, the biggest pitfalls in this area is if you think that you're getting donations, but you're actually selling advertising and that can create some unintended tax consequences for the nonprofit because all of a sudden the organization hands over their bookkeeping records to the C P A and the C P A says, great, here's your 990T for unrelated business income tax.
[00:06:38] And you're like, what? Um, if you weren't expecting to pay tax on that revenue, that can be a problem, right? So, you have to be careful in what you promised because you can pretty quickly turn a sponsorship into an ad.
[00:06:54] Alicia: Are there any guidelines on that, you know, cuz that can be kind of a fine line to walk sometimes.
[00:06:59] Jess: Oh, totally. And this, this can really slice the bologna thin. I mean, there are some things that could turn on, like just a couple of words in your copy or in what you say at the podium. Um, there, you know, the IRS does have sort of a, a page on this, and I, I can pop that link to you so you can throw that in the show notes that would...
[00:07:21] Alicia: That would be great!
[00:07:22] Jess: …probably be helpful or probably just really confusing because as you go through that page on the IRS, you to read the rules around this, you know, it's things like, okay, what goes to make it advertising? You think it's a sponsorship, but there are things where the IRS is just like, nope, that's advertising.
[00:07:43] So if you promise the sponsor a certain number of impressions or if you promise a certain amount of attendees at the event that will make it advertising,
[00:07:54] Alicia: Got it
[00:07:55] Jess: If you agree to promote their brand or product for them, right? So if you stand up at the podium and say, “Hey, Dog Zoo makes the best dog collars, make sure you thank our sponsors today by buying a dog zoo collar at their booth”.
[00:08:14] No, that's not a sponsorship. That's advertising. Right? Or if you allow them, to take your logo and your brand and put it on their product or in their magazine or something like, Hey, we have the backing of the Sierra Club. Aren't our outdoor materials the best because Sierra Club approves of us. Right?
[00:08:36] That's also advertising. Um, there's some things where it's, there's no exceptions. If it's a trade show or a convention, it's kind of automatically deemed advertising. So, you should just know that going in, if it's an exclusive deal, and you agree that only one realtor will be allowed to sponsor this event supporting raising awareness around housing issues.
[00:09:02] That's advertising. If it's an exclusive right and there's just like a really long list. I feel like people are already going, zzzz (snore). But the point is there's just a lot of details around what your deal is with the sponsor that can turn it into advertising pretty quickly. And they're the things that nonprofits want to promise, right?
[00:09:25] Like how many people are going to be at this event? Well, that's a selling point to make it more appealing to the company to sponsor, because all these eyeballs are going to see your brand associated with our good deeds. Right? There you go.
[00:09:40] Alicia: So you can tell them how many you’re hoping to get at your event, but you can't promise a certain number. Is that sort of the fine line?
[00:09:49] Jess: Right. See, and this is where I'm like, it's, it's slicing the bologna pretty thin because you don't want to make that the value exchange. But also, how the heck do you sell people on a sponsorship without making that the value exchange?
[00:10:06] Alicia: Right. I mean, I've actually been talking to nonprofits about this and sort of trying to figure out how to create that win-win proposition for the sponsor and the nonprofit. But yeah, a lot of that involves some of those value propositions, right?
[00:10:25] Jess: Yeah, and, and this is where, you know, this is where it gets hard because from the IRS's perspective, if it's a little bit advertising, it's all advertising. Um, now the reality is, does the IRS have agents that are going to pop up out of the trash cans at your event and say, oh, I see you, that's advertising?
[00:10:50] No. Right? So, you know, there's, there's a fair amount. Like, well, it's not really going to matter in the end. But how you're tracking this on your books will matter. And that is something that you need to think about as you go into event planning and whether you are going to pay a little bit of unrelated business income tax or not, based on those, um, sponsorships.
[00:11:19] Alicia: So is this a topic to take up with your attorney, with your tax accountant? Both?
[00:11:26] Jess: Oh yeah, absolutely. I mean, whenever you're planning an event and I'm, I'm guessing I'm preaching to the choir here, like you don't want to just kind of like blunder in and sort of make things up and then decide randomly to, you know, and that can be, especially for smaller nonprofits, that can be sort of like the way.
[00:11:46] That they approach things because they have limited resources. And then for bigger nonprofits it can just be like, well, we've always done it this way. And so there's like a, the, what is that word? Entropy. There's just some like gravity following the concept because we've always done it that way. And if you want to change it, that might ruffle some feathers or whatever.
[00:12:05] So having a plan, if you don't have any plan, make sure you have a plan and part of that plan is, yes, talking with accounting, talking with legal, you know, making sure that you're not accidentally getting crosswise of something. Um, I can remember when, back in my in-house days, when I was in-house, how our controller, would just lose his mind because people out in the, in the field running program events would just do stuff without checking in with the office. And it would just be like, why did you do it that way?! You know, so…
[00:12:45] Alicia: So how about, this is a fairly specific situation, but, and maybe you have an answer, maybe you don't, but so I've seen instances, my clients are too small for this, but I have seen instances where, let's say you have a car dealership and they are the sponsor for the event, but then they're also donating a car for a raffle or some other prize. Where does that fall in that sort of, in that line?
[00:13:14] Jess: So, I mean, obviously the, the car is an in-kind contribution, right? I think one of the things here is we tend to always assume that making a donation is good for the business, like it's a deductible gift. But the reality for most companies is, and I'm not a tax accountant, I don't do taxes and I'm not a, a tax expert, but the reality as I understand it is that this is an expense. It's, it's not like you can give them a thank you letter, here's our tax ID number if you know, thanks for that 2022 Humvee.
[00:14:00] Alicia: Oh, let's hope not.
[00:14:02] Jess: But, um, it's not gonna make a difference to them. So, then it's sort of like, why do we care? You know, for the most part, they're wanting to know that you are a reputable charity and it's going to be an expense on their books, not a deductible event. Because companies are companies, they don't take income tax deductions.
[00:14:28] They're not individuals. So to some degree, if the sponsorship includes donating a car, this is, you know, that's their tax problem. How they're going to treat it on their books is not the nonprofits problem, and we can't give them tax advice. One thing I see a lot are especially startups who end up being told by corporations that they won't give to them unless they're [501]c3, which I find fascinating that there's this thing in corporate culture that they participate in philanthropy. They can't give away some of their profits unless it's a c3, which is, I don't know where that comes from. I'm assuming that it's just a psychological issue. I don't know that there's any valid reason for that.
[00:15:22] Alicia: Really? I have not heard of that, but that's, that's fascinating.
[00:15:26] Jess: Oh, it's, it's a primary reason people want to start nonprofits sometimes.
[00:15:30] Alicia: Really?
[00:15:31] Jess: I talk to a lot of those people. Yeah.
[00:15:34] Alicia: Well, I mean, corporations get sponsors all the time for things for, you know, look at the NFL. I guess I can't say for sure. I don't think they're a nonprofit. I think they have a nonprofit arm
[00:15:44] Jess: NFL is, yeah, they're a c6. They're not a c3. Yeah, they're an association, which, that's a whole other podcast,
[00:15:53] Alicia: it’s a whole ‘nother ballgame. I know. That's no pun intended. So back to my last situation with the dealership that's a sponsor of the event and then they're also donating a car, legally or through the IRS or whoever, they're not gonna look at those collectively, they'll take it. individually? Okay, yes, they're a sponsor, but then they're also a donor kind of thing. They're not gonna look at the whole sort of value exchange, value package? ‘Cuz that's a lot of advertising for a dealership to have this car there where people are looking at it, climbing on it, getting raffle tickets for it.
[00:16:29] Jess: Yeah. I mean, the answer unfortunately is, it depends, right? It depends how the nonprofit books that revenue. Does it book it as advertising revenue, or does it book it as a contribution? Obviously they're gonna want to book it as a contribution and not pay tax on it. So, then the question becomes, well, how do you keep this a sponsorship and not have it be advertising?
[00:16:51] And that's where you gotta go back to that laundry list of stuff not to do, right? So when you get up on the, on the stage to thank your sponsors at, you know, the touch-a-truck event that features a car giveaway or something. Um, you don't say, Hey, isn't Jess's car dealership great? Everybody should buy a car at Jess's. We want to thank them for being here today. You don't turn it into advertising. You say, we want to thank our sponsors, love that they are supporting this event, super important to have partners like you in this community. Thank you so and that's how you keep it a sponsorship
[00:17:32] Alicia: Boom. Done
[00:17:33] Jess: Yeah. Um, so it's, it really just comes down to making sure you don't get too crosswise of the like, list of no-nos that the IRS has. And if you're going to do something like a trade show or a convention, that's fine. Just know that that's okay. You know, you're going to have some UBIT, it's not a big deal.
[00:17:54] Alicia: and factor that into your budget.
[00:17:56] Jess: yeah.
[00:17:57] Alicia: So you're going to send me a link for those, kind of, those IRS rules, because I think that's the biggest thing. I, I mean I actually have gone online and looked and have really had a hard time finding out who makes those rules, what are the rules, you know, making sure that you're in compliance with those.
[00:18:13] Cuz one thing that we talked about and I wanna come back to is sort of that tiered package mindset. It's so ingrained in nonprofits to create this tiered package of benefits, we'll call them that. and yet you wanna think outside the box and, and not do that. But again, maybe that's why it's so ingrained is because of that fear of what I can and can't do, kind of thing. And so those tiered benefits are easy. Um, so what are your thoughts on that?
[00:18:45] Jess: I just think tiered benefits exist and what, what I think you're talking about is that silver sponsor, gold sponsor, platinum sponsor, diamond sponsor, all the GEMS sponsor. Um,
[00:18:59] Alicia: All the metals. All the gyms.
[00:19:00] Jess: I just think that is lazy . Uh,
[00:19:07] Alicia: I totally agree.
[00:19:08] Jess: here's the thing. Nonprofits are very much like lawyers. Nonprofits are generally pretty risk averse.
[00:19:18] Alicia: Yes, definitely.
[00:19:19] Jess: We like to do what's been established as a winning formula in the past because taking risks means maybe our pie chart that says 92 cents of every dollar goes to programming would suddenly say 87 cents. Oh my God, no one's ever going to give to us again. You better just go back to the way it was before.
[00:19:38] Because what if we took a risk and then it cost us money and, Ah! So nonprofits are very risk averse, culturally, just as a broad stereotype, right? And so I think the fact that that is the way a lot of people do, it just means that is the way a lot of people do it, and it's not necessarily the best way.
[00:20:02] I mean, First of all, why are we saying if you give more money, you are a better company? There's like a weird equity social justice angle that I really don't like in there that feels antithetical to a lot of nonprofit missions. So what do we have a better, better relationship with our diamond sponsor? Are they more worthy?
[00:20:29] Alicia: That's a really great point. I, I actually haven't thought about it that way. That's a really great point. So if you were, again, back to the question, if you were running a nonprofit, how would you do things differently on the sponsorship front?
[00:20:43] Jess: Well, I think the first thing I would do is have a generative conversation about how, how would we want our event to go. And I would probably bring in somebody from the outside who has a little bit more perspective and maybe has a little bit more credibility to help us get out of our rut or to help us get out of the industry's rut and be creative and take some time to really think through. Because I think the package thing is just sort of a knee jerk reaction. It's like the simplest cognitive shortcut to get to a place where you can raise the money. Um, and so it's extra work, but I, I think you would be showing yourself as a leader in the space to do something totally different.
[00:21:32] And you might find that your relationships with sponsors are even better if you approached it a different way. I don't know what that different way is, but I would be asking people like you or you know, other fundraising consultants and just crowdsourcing this and saying, “Hey, what are y'all thinking?”. What do you wish you could try but your board won't let you?
[00:21:57] Alicia: We, we actually talk about this a little bit on your podcast, where the assumption is, oh, if I just create these tiered packages, it's gonna be so much faster and easier. And in the long run it's not
[00:22:10] You sort of blanket this thing out and hope to see what sticks, and then you have to follow up and you have to, and that's not what sponsorship is. It is about building relationships and you do have to put in the work. And if you just put in a little bit more on the front end, you're gonna see the rewards on the back end much faster. I think.
[00:22:29] Jess: Yeah, I mean, you're also limiting people two, so two things. You're limiting people by putting them inside of a box and saying, pick which box belongs to you. What if they were prepared to be a $50,000 sponsor and your top sponsorship is 20?
[00:22:49] Alicia: Yes!
[00:22:50] Jess: You would never know that because you've predetermined what your highest level of giving is, which seems insane to me. Then the other thing is you are presetting yourself up to get into this advertising and unrelated business income thing, because when you have tiers, now you or you're like, well, what do you get? When you donate at the higher level, you need to get more. Well, now we're, we're focused on ‘getting’ and the value exchange, and now we're thinking like, well, your logo's gonna be bigger and your logo's gonna be everywhere, and you're, you're gonna get more impressions and you're gonna get an opportunity to speak and you're not.
[00:23:33] And like, those are all things that push you into the unrelated business income. This is advertising pool and it's not always a good idea. Like I have definitely seen sponsors who've dropped the sponsorship because they were promised stuff that they didn't get. So if attendance is bad at your event and your whole pitch to your sponsors is based on x thousands of people will come and they don't…
[00:24:08] Alicia: Right.
[00:24:08] Jess: And now it's not about the mission, it's about we were selling advertising.
[00:24:13] Alicia: Oh man. So bottom line, talk to Jess before you, before you start, promising things on your, in your sponsorship packages or as we said, don't do those packages at all and just talk to your sponsors about how you can have a, a win-win partnership that maybe, hopefully doesn't cross that line. Or if it does, you're, you're planning for it in your finances and your budget. so just to, summarize our key topics here…
[00:24:41] Jess: You want me to do it? I can do it.
[00:24:42] Alicia: I would love that.
[00:24:44] Jess: Yeah. Here, here's what I've got for sort of the key points I think we made. So start from the end here. Don't overpromise. Underdelivering is going to hurt your relationship and remember.
[00:24:59] Alicia: That’s a general rule for life, isn't it?
[00:25:00] Jess: Yes, it's true. It’s just like a good motto for life is under promise and overdeliver, not the reverse.
[00:25:06] And because this is all based on relationships, corporations are not just a weird wallet that you can open up periodically for an event. There are human beings who need to connect with you and your mission. So remember that all sponsorships are based on building relationships. Um, I would…
[00:25:25] Alicia: That's one of my biggest peeves with nonprofits is treating sponsors like an ATM and you know, so yeah, totally.
[00:25:33] Jess: yes. This is not a shortcut to get around the usual work of fundraising.
[00:25:38] Alicia: Right.
[00:25:39] Jess: Do the usual work of fundraising. I think that's another takeaway here. Um, also, if you're selling advertising, that's okay. Be honest. Be honest with yourself that that's what you're doing. And. It's not the end of the world. If you have to pay a little UBIT. If you have to pay a little unrelated business income tax, just plan for it. You know, if you know it's coming, it's a lot easier to deal with.
[00:26:06] Alicia: And I think it opens you up to be able to offer more to that sponsor then if you can plan for it.
[00:26:12] Jess: Yeah. And if it's important to you to say, what do you get? And you are a silver, platinum, gold, bronze, whatever, then you know, you can lean into the advertising aspects. Um, and I would say another takeaway is just remember that for a lot of businesses, it's not deductible for them anyway, and they might want to call it a sponsorship, but you don't have to tell them it's advertising. You can just know that on your end and treat it that way on your books out of caution or because you know it is. And they don't need to know that. And again, it's about the relationship and about their investment in your mission and supporting your mission. So if you do lean into the advertising, don't worry about talking about that with them. That's your books. Their tax situation is their tax situation.
[00:27:03] Alicia: Right.
[00:27:04] Jess: That's all I got.
[00:27:05] Alicia: okay. This has been so fascinating for me. I, like I said, I've actually searched for years for kind of trying to figure out these rules and understanding that yes, you can do it, you just have to, yeah, you might take a little tax it or, um, just need to plan for it. So, at the end of every episode, I always have an action item for listeners.
[00:27:28] And so for today's action item, Jess has a free course that is going to help you as a nonprofit diagnose. The overall health of your nonprofit. So in order to get that course, take that free course, I should say go to birkenlaw.com/healthynonprofit and to to take that quiz. And Birken is spelled B as in boy, I R K E N.
[00:27:54] And I will have the link to Jess’s free course and all of her social media links in the show notes. So please follow her and also listen to her podcast, Charity Therapy, cuz Jess is hilarious, She has great information but is also hilarious. Jess, thank you so much for joining me today and thank you to our listeners.
[00:28:14] If you enjoyed today's episode or any of the others, please subscribe, rate, and review my Podcast, and Jess’s Podcast, Charity Therapy, on Apple, Spotify, or anywhere you listen to your favorite podcast. As I mentioned, I was a guest on Justice Podcast in February of 2022, and I'll put a link to that episode in the show notes.
[00:28:36] Thank you so much. Thanks for joining me today. We'll see you next, time.