If your business provides sponsorship to an individual or organisation, it may be tax deductible. Sponsorship is different to ‘advertising’ or ‘donations’. It is defined as when the taxpayer incurring the expenditure expects that his/her business will be promoted in some way, whilst the sponsorship recipient will also be benefited in some way.
The IRD’s position is that for sponsorship to be tax deductible there must be a connection between the sponsorship expenditure and the business/income-earning activity. Businesses must be able to show that the sponsorship is likely to increase their taxable income.
Inland Revenue has published an interpretation statement “Deductibility of sponsorship expenditure”, which indicates that in the following types of circumstances the sponsorship expenses would be tax deductible:
- A deduction may be allowed for sponsoring a sporting team where the business name is displayed on players’ jerseys.
- A deduction is allowed for the cost of reimbursing a sporting team for its purchase of, for example, a van which displays the sponsor’s name.
- A deduction may be allowed for the cost of sponsoring a sporting competition named after the sponsor.
- A deduction may be allowed for an accounting firm that sponsors performances of an opera to gain exposure to likely attendees of the performances.
- An up-front sponsorship payment covering a three-year advertising period may be subject to the rules on prepayments spreading the deduction allowed.
- The rules on prepayments may not apply to a contribution to the construction of a swimming pool complex in return for naming rights for 10 years.
- A deduction may not be allowed for a gift to a school attended by the donor’s child, where the school is in another district away from where business activities are conducted.
- A deduction may not be allowed for the sponsorship of a sporting activity that is a hobby of the business proprietor, but which is a completely different activity from the business.
In demonstrating a connection between sponsorship expenditure and a business’ income, consider the following example. The UHY Haines Norton Helensville office is approached to sponsor the local college’s First 15 rugby team. In return for their sponsorship, the office’s logo and phone number are printed on the team’s rugby jerseys, jackets and the team’s 4m pop up marquee that is on the side lines at all of their games. UHY believes the increased recognition and local advertising will help to raise their profile in the wider Helensville area and generate new business enquiries. In this way the sponsorship can be shown to have the ability to increase their taxable income and therefore it would be tax-deductible.
A sponsorship agreement clearly outlining the recipient’s intention and method of promoting the business is important in establishing the connection between sponsorship and any anticipated increase in taxable income.
The sponsorship recipient does not necessarily have to be a registered charity or donee organisation in order for the expenditure to be tax deductible.
Please contact us if you have questions regarding the tax-deductibility of sponsorship expenditure.