February 2003

Cause Marketing: Opportunities for Assisting Exempt Organizations and Sponsors

By Claudia L. Kelley and Tamara K. Kowalczyk

Cause marketing is the fastest-growing segment in advertising. Also known as strategic philanthropy, cause marketing is defined as “the process of formulating and implementing marketing activities that are characterized by contributing a specific amount to a designated nonprofit effort that in turn causes customers to engage in revenue-providing exchanges.” For example, when the Field Museum of Chicago bid for Sue, the Tyrannosaurus rex fossil sold at auction in 1995, the museum secured the $8.3 million from the McDonald’s Corporation and Walt Disney Company. Among other benefits to the companies, the McDonald’s name would appear on the museum’s new fossil lab, while Disney would display a copy of Sue in its parks. The cause-marketing strategy enables companies to justify their donations, especially during recessionary times, when there are fewer resources and greater need.

There are many other examples of corporations following a philosophy of “doing well while doing good.” ADT, a manufacturer of alarm systems, gives away personal-security devices to battered women; Kimberly -Clark is building playgrounds in poor neighborhoods; Barnes & Noble sponsors poets and writers organizations as well as First Book, a charity devoted to improving children’s literacy; Ramada Inns sponsors Child-reach, an international humanitarian organization that has helped raise the living standards for millions of children since 1937.

In addition to helping to differentiate products in a competitive marketplace, cause marketing has other benefits to both nonprofit organizations and the corporations that sponsor them:

Accountant’s Role

Due to limited organizational infrastructure, many charities find themselves ill-equipped to deal with fundraising through corporate sponsorships. Accountants may be able to help nonprofit directors develop plans for solicitation of corporate sponsors and provide advice on many financial matters such as fund management, tax compliance, and financial reporting.

There are many good reasons for accountants to consider the opportunities presented by providing assistance with cause marketing. First, helping a nonprofit raise money for its cause helps to ensure the continued vitality of the nonprofit. Second, assisting with cause marketing presents an opportunity to market the services of the accounting firm, including advice on the tax consequences of sponsorships. Third, support of a cause demonstrates social responsibility. Such an association can have a positive effect on the reputation of an accounting firm and its employees’ morale.

CPAs can also provide financial advice on developing a business plan for funding a corporate sponsorship. They can educate potential sponsors on the facets of “strategic giving” in order to make sure that the company’s charitable spending adds value and fits the business’ goals.

Several guidelines for developing sponsorships should be kept in mind:

Tax Consequences of Sponsorship Income

It is important to consider potential tax consequences to both the nonprofit organization and the sponsor. Under the unrelated business income tax (UBIT) rules, receipt of funds that are not essentially related to the nonprofit’s mission may be taxable. Nonprofits can receive qualified sponsorship payments (QSP) from commercial sponsors without being subject to UBIT, as long as the form of acknowledging the sponsorship does not constitute advertising. The IRS defines a QSP as any payment to a tax-exempt organization by a payor engaged in a trade or business where there is no arrangement or expectation that the payor will receive any substantial return benefit other than the use or acknowledgement of the payor’s name, logo, or product lines in connection with the activities of the exempt organization. Clearly, nonprofit organizations and their sponsors must take precautions in developing sponsorship agreements so as to avoid negative tax ramifications.

Claudia L. Kelley, PhD, CPA, is an associate professor at Appalachian State University, Boone, N.C., and
Tamara K. Kowalczyk, PhD, CPA, is an assistant professor at Western Washington University, Bellingham, Wash.

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