Sponsorship or donations seem close, but accounting-wise there is a big difference.
What is the difference?
A donation is the giving of money (among other things) where specifically no quid pro quo is required from the person receiving the money, as is often the case with charitable organisations.
A sponsorship, on the other hand, does require a quid pro quo so that the sponsor obtains a benefit. For example, sponsorship is a way for companies to promote their business by providing financial support to sporting events, cultural activities, good causes and other organisations.
Impact on accounting
From the differences between a gift and a sponsorship, you can also immediately see the impact on accounting, namely:
Gift 🎁
A donation is not a deductible professional expense for sole proprietors’ accounts. So paying a donation will have no impact on profit. Consequently, there is also no point in stopping a donation in your sole proprietors’ accounts, there should be no impact anyway.
Tip:
The government does allow you to include certain donations in your personal income tax in order to pay less personal income tax – via your yearly tax letter. Find out more about it here.
These donations can be reported directly in your personal income tax return and are separate from your sole proprietors’ accounts.
Sponsorship 📢
Sponsorship can be a professional expense for your sole proprietor if it ensures that you increase brand awareness, attract more customers, generate more income, etc. This is difficult to prove effectively, but the intention must already be evident.
For example, if a sole proprietor sponsors a local festival and in return the sole proprietor’s logo and name appear on a poster, this may be considered a professional expense. In such a case, you may therefore enter this sponsorship directly as an advertising cost.
If the same sole proprietor makes a financial contribution to a local festival, but gets nothing back in return. Then we do not speak of a professional cost, because no additional publicity has happened.
Conclusion
It is important to keep sufficient evidence from that publicity. Because that publicity ensures that it is effectively a sponsorship (and not a donation).
Make sure it is at least stated on paper that you are going to sponsor an amount in exchange for publicity. This publicity should also be clearly described, for example: mentioning the name and logo on a billboard, a coaster, a brochure, etc.
This way, you can also immediately convince a tax inspector that this is indeed deductible sponsorship rather than a donation.
Tip:
A gift or sponsorship is something other than a business gift. A gift or sponsorship is addressed to an organisation or company, whereas a business gift is addressed to a person. Find out all about a business gift here.
