Fiscal sponsorship refers to a relationship in which one organization that is tax-exempt serves as the official recipient of charitable donations for another organization that is not yet recognized as tax-exempt. In this relationship the organization that has tax-exempt status is the "fiscal sponsor" and the organization that (usually) does not have tax-exempt status (and may not even by incorporated) is the sponsored organization. Typically the sponsored organization seeks out a fiscal sponsor that has a similar or consistent mission. There are some charitable nonprofits that actually have as part of their mission to serve as fiscal sponsors -- they may even refer to themselves as "incubators" of other nonprofit programs.
The role of the fiscal sponsor can include performing many different administrative functions on behalf of the sponsored group, including taking on the responsibility of receiving and administering charitable contributions on behalf of the sponsored organization. Since the donations are made directly to the fiscal sponsor, which then provides funds to the sponsored program, this arrangement enables donors to -- in essence -- make tax-deductible contributions to support the activities of the sponsored organization. In many sponsorships the fiscal sponsor charges an administrative fee for its services, usually a percentage of the budget of the sponsored organization or program. Although this arrangement appears to be a "run-around" of tax regulations that provide donors a deduction for their charitable gifts, in actuality the IRS has blessed the function of fiscal sponsors, as long as the fiscal sponsor has discretion to determine how to use the funds that the donor contributes.
Fundamentally, fiscal sponsorship allows a program or organization that does not yet qualify as a recipient of deductible contributions to raise funds for its operations that will be tax-deductible to donors. (As background: Donors are not able to receive a deduction for a contribution to a nonprofit that is not recognized as tax-exempt. See IRS Publication 557. Additionally, the guidelines of most private foundations explicitly require grantees to be recognized as tax-exempt by the IRS. Consequently, groups that are not formally recognized by the IRS as tax-exempt may not be eligible for certain contributions.) Having a fiscal sponsor can benefit a program or entity that is not tax-exempt by providing a pathway for it to receive charitable contributions.
A newly formed nonprofit finds another nonprofit (one that is already tax-exempt and generally has a similar mission) that agrees to accept the administrative responsibility of receiving charitable gifts on behalf of the sponsored organization. The fiscal sponsor must first determine that serving as a fiscal sponsor is consistent with its mission (and does not jeopardize its own tax-exempt status). The sponsored organization arranges with the fiscal sponsor to receive grants or contributions on its behalf. This arrangement allows the sponsored organization to solicit contributions to support its programs, with the understanding that the donation will be made to the fiscal sponsor, not to the sponsored program/organization directly. Since the fiscal sponsor is tax-exempt, the donor’s contribution will qualify as a deductible contribution.
Using a fiscal sponsor satisfies IRS requirements as long as the fiscal sponsor maintains the right to decide, at its own discretion, how it will use the contribution, and in fact uses it consistently with its own tax-exempt status. Generally there is no question but that the sponsor will grant the contribution (minus an administrative fee if one applies) to the sponsored organization - but it could decide to use the funds elsewhere. Maintaining such control over the donated funds is a requirement of a legitimate fiscal sponsor arrangement.
Fiscal sponsorships should be memorialized in a written agreement between the fiscal sponsor and the sponsored organization. The agreement should specify that the fiscal sponsor is responsible for all legal compliance relating to receiving, reporting, and acknowledging charitable donations, and also describe the administrative fee that the sponsored organization will provide to its fiscal sponsor.
We encourage you to explore these additional resources on fiscal sponsorship, including links to sample agreements, tips on finding a fiscal sponsor (or serving as one), case studies, and background on pitfalls to avoid.
Frequently Asked Question
Q. Can we fundraise after we are incorporated, if our nonprofit is not yet tax-exempt?
A. Yes, however, a nonprofit cannot claim to be a tax-exempt 501(c)(3) until the IRS issues a “Determination Letter” of tax-exempt status, therefore, many donors (such as corporate and private foundations) normally will avoid giving donations until a nonprofit receives its Determination Letter. While you are waiting for your Determination Letter, you might want to consider using a “fiscal sponsor” that will accept the donations for your organization, take care of the accounting requirements (for which your nonprofit would pay a small fee) and give your organization a grant for its activities/operations.
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