A taxing question

The tax treatment of donations involving naming rights is a bit complicated.

Virginia Business turned to Mary Heen, a law professor at the University of Richmond, for an explanation. Her legal expertise is tax law, tax policy, legislation and regulation.

She led us through the thorny issue of charitable deductions and naming rights.

Heen says the tax issue in charitable deductions stems from this question: Has the donor received a benefit that is “more than incidental” in return for a contribution?

“When I receive an inexpensive mug or tote bag in exchange for a public radio contribution, the token thanks would be treated as incidental, and I may not need to reduce the amount of the contribution,” she says.

“However, if I receive a valuable item or substantial benefit in return for my gift, or if I bid on and win an item at a charitable auction, I have to subtract the value of the item or benefit received from the charity from the amount of my contribution claimed as a charitable deduction.”

Many charities, she notes, inform donors of the value of benefits they receive as “thanks” for contributions.

This process tends to be a case-by-case determination, Heen says, but there are tax regulations and rulings setting some guidelines.

“In the context of naming rights, it would generally be easier for an individual donor to show that having a building or room named after the donor is incidental to the charitable gift than it would be for a corporation engaged in selling products or services,” Heen says.

Nonetheless, even in the corporate context, naming rights have generally been treated as not providing significant benefits or monetary value, she says.

If a corporation uses naming rights as advertising, and if the corporation itself (rather than, for example, a corporate foundation) makes the contribution for the naming rights, the company could claim the payment as a business advertising expense, Heen says.
Another legal issue involving naming rights concerns the recipient of the donation.

“What if you have a company that has a significant scandal in the community?” asks Terry Burton of Windsor, Ontario, the president of Dig In Research and author of the book “Naming Rights; Legacy Gifts & Corporate Money.”

That potential problem, he says, is usually addressed in a clause in the naming rights agreements allowing names to be removed for bad behavior.