We’ve received a lot of inquiries about fiscal sponsorships recently. Sponsorships can offer cost savings and administrative efficiencies for small charitable projects, although they can easily become an administrative hassle for the fiscal sponsor if good rules aren’t in place to manage the sponsored groups. Sponsoring organizations should understand the responsibility they’re accepting and sponsored groups must comply with the sponsor’s rules in order to protect the exempt status of the sponsor. Fiscal sponsorships are an important facet of charitable community engagement and deserve some explanation for those who may be new to the concept.
Fiscal sponsorships typically arise in one of two common situations:
- A new charitable organization is in the process of applying or has applied for federal exempt status, but has not yet received an IRS determination letter. Although they can accept charitable donations if they expect to receive exempt status retroactive to the date of formation, some large donors may insist on the assurance of a determination letter before handing over the funds.
- An informal group, such as a parent group or “friends of…” group, would like to do some charitable work on their own, funded by donations, that furthers the exempt purpose of another charity, but is not commissioned by the charity. The informal group’s work is often a temporary project or infrequent activities.
Accounting for revenues and expenditures
The fiscal sponsor is a charitable organization that accepts donations on behalf of the sponsored group and disburses funds based on the requests of the sponsored group. It sounds simple enough, but the funds are not simply pass-through items. They must be treated as revenues and expenditures of the fiscal sponsor, which means the fiscal sponsor is responsible for sending donation acknowledgement letters, reporting the activity on its financials and Form 990 and ensuring that the funds are used for charitable activities that further the exempt purpose of the organization. Even if the sponsored group is a legal entity that has applied for exempt status, donations made to the sponsor are considered revenues of the sponsor. The sponsor must have ultimate control of the funds to have a true fiscal sponsorship relationship.
Some sponsored funds accept donations directly to their organization, using the sponsor only for certain donations that require an IRS determination letter. While this is technically allowable, it can get confusing for donors and for the organizations involved. If exempt status is not granted and the sponsored organization has not been reporting all donations received to the fiscal sponsor, the donations that are considered made directly to the sponsored organization will not be tax-deductible to the donor. Reporting all donations to the fiscal sponsor so that the sponsor can treat the revenues as their own limits the risk for donors.
Filing Form 990
If the sponsored group is not a legal entity and is not accepting any revenues directly, it should not file any tax forms. The entity is technically just a branch of the fiscal sponsor, which is reporting all revenues and expenditures as its own.
If the sponsored group is a legal entity, it must file the appropriate tax form with IRS each year. Form 990 should be filed if the organization expects to be granted federal exempt status effective for the tax year in question. Funds received and used outside of the fiscal sponsor umbrella should be reported as well as any funds received as a grant from the fiscal sponsor. If all funds received have been reported to the fiscal sponsor and the fiscal sponsor treats them as their own, the sponsored organization should treat them like any other funds that came through the fiscal sponsor. Funds from the fiscal sponsor should be reported as a donation from the fiscal sponsor and the expenditures should be reported as they are made. If the fiscal sponsor makes expenditures on behalf of the sponsored group rather than giving the funds to the sponsored group to spend, the fiscal sponsor should report the expenditures as their own.
Other Considerations
Note that a fiscal sponsorship is different from a fiscal agent relationship. A fiscal agent simply accepts donations and passes them through to another organization or group without the responsibility of controlling how the funds are used. This means that donations to an organization or group with a fiscal agent are not necessarily tax-deductible to the donor. If all of the elements of a fiscal sponsor are in place, especially the control over how the funds are used, the donation is tax-deductible to the donor.
Administrative fees charged to sponsored groups by the fiscal sponsor are generally not taxable as unrelated business income if the project being sponsored furthers the exempt purpose of the fiscal sponsor.
It’s a good idea to have a written contract between the fiscal sponsor and the sponsored group, outlining the rules, obligations and reporting deadlines. This protects both organizations and is a great opportunity to ensure everyone involved understands exactly what the relationship entails.
