The Rules of Fiscal Sponsorship
Fiscal sponsorships help fledgling nonprofits get off to a fast start. In a fiscal sponsorship, a group without IRS 501(c)(3) tax-exempt status raises funds through a nonprofit with 501(c)(3) tax-exempt status. The tax-exempt group ensures that the sponsored group uses its funding for stated tax-exempt, charitable purposes. This relationship typically comes about when a group seeks funds from grant makers that give funding only to 501(c)(3) nonprofits. Sponsors must diligently follow sponsorship rules.
Joshua Sattely in his white paper, "On Comprehensive Fiscal Sponsorship," warns that a fiscal sponsor must only offer a sponsorship to a group or project whose purpose and mission align with its own. When a 501(c)(3) nonprofit assumes sponsorship, the IRS considers it and the sponsored organization to be one and the same. All of the IRS 501(c)(3) nonprofit's activities must align with its stated mission in order for it to retain its tax-exempt status.
According to IRS rules, fiscal sponsors retain control over how funds will be used and must keep records that demonstrate the funds were used for charitable 501(c)(3) tax-exempt purposes. Besides ensuring that a grant's financial, programmatic and administrative requirements are met, the sponsoring nonprofit can also provide other services to sponsored groups. In comprehensive fiscal sponsorships, sponsoring organizations typically supply office space and accounting, human resources and other back-office activities, and the sponsored group becomes its program, governed by the sponsor's own board of directors.
A fiscal sponsorship is created and defined by a letter of agreement, or contract, ideally drafted by a lawyer. Fiscal sponsorships differ according to the needs and requirements of the fiscal sponsor and sponsored project, Grant Space notes, so there is no one legal contract covering all fiscal sponsorships. An agreement provides details regarding what each party expects from the other, what back-office services the sponsoring organization will provide, if any; how IRS reporting requirements will be handled and what fee the sponsor will charge for its services. It is also important for the agreement to provide information on the relationship's conclusion, such as when that will likely occur and how the sponsored organization's assets will be distributed. The National Network of Fiscal Sponsors recommends the sponsor's senior staff and the project's leaders meet regularly to evaluate the relationship. As circumstances develop over time, the sponsorship may no longer be in the best interests of either party.
According to the Foundation Center, sometimes a 501(c)(3) nonprofit may act in a very limited way to pass funding to non-501(c)(3) group. But if the 501(c)(3) nonprofit does not provide sufficient oversight over the project, the IRS might conclude that the foundation or other grant-making entity has provided funds directly to a group without 501(c)(3) tax-exempt status. This prevents the grant maker from taking a charitable deduction and the non-501(c)(3) group will lose its funding. The 501(c)(3) nonprofit can also lose its tax-exempt status for allowing funds to be used in a non-charitable manner.