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 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. This is because the fiscal sponsor should only be using its assets for its own charitable purposes so it must make a decision whether or not providing a grant to the sponsored organization/project plays a role in advancing the sponsor's mission. Interestingly, there are some charitable nonprofits that have adopted the role of serving as a fiscal sponsor for other groups as part of their own mission -- 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 organization/project, 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 is a tax-exempt organization, which then provides funds (a grant) to the sponsored organization/program, this arrangement enables donors to -- in essence -- make tax-deductible contributions to support the activities of the sponsored organization. It is quite common and perfectly acceptable for the fiscal sponsor to charge an administrative fee for its financial administrative services, which is usually a percentage of the budget of the sponsored organization/program. As long as the fiscal sponsor has the discretion to determine how to use the donated funds and is intentionally deploying its own assets to further its mission, this arrangement is consistent with the IRS regulations that define a tax-exempt "501(c)(3)" charitable nonprofit.
Fundamentally, fiscal sponsorship allows a program or organization that does not qualify itself as a recipient of deductible contributions to raise funds for its operations that will be tax-deductible to donors. Inthis way, making an arrangement with a fiscal sponsor can benefit an organization/program that is not tax-exempt by providing a pathway for revenue that it may otherwise not be in a position to receive/attract. (As background: donors are not able to claim a tax deduction unless they itemize deductions and donate to an organization that is recognized by the IRS as tax-exempt pursuant to IRS Code Section 501(c)(3). 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.)
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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