Fiscal Sponsorship - New Annotated Template
Reprinted with permission from The Maine Nonprofit Law E-Bulletin May 2021, by Robert H. Levin, Attorney-at-Law, Law Office of Robert H. Levin.
Over the years, I’ve fielded countless questions about fiscal sponsorship, a type of arrangement has become a growing part of the nonprofit world. Recently, I collaborated with the Maine Association of Nonprofits to establish a sparkling new and improved Maine Fiscal Sponsorship Annotated Template.
As the term is generally used, fiscal sponsorship refers to an arrangement whereby a recognized 501(c)(3) nonprofit provides certain fiscal services for an organization that is not a 501(c)(3). The chief reason animating most fiscal sponsorships is to allow the non-501(c)(3) organization to piggyback on the 501(c)(3)’s eligibility to apply for private foundation grants and to offer charitable deductions to individual and business donors.
Although there is very little formal law that guides fiscal sponsorship, the overriding concern of the Internal Revenue Service is that the arrangement not be a simple “conduit” or “pass-through,” whereby the Sponsor collects checks or signs grant applications and then simply passes on any money received from donors or grant funders. Rather, the IRS requires that the Sponsor provide meaningful oversight of the Sponsored Organization’s activities, to ensure that these activities further the tax-exempt charitable (or educational, religious, etc.) purposes of the Sponsor. In IRS legalese, any funds collected and disbursed by the Sponsor must be “subject at all times to the ultimate direction and control” of the Sponsor. Thus, the Sponsor legally assumes responsibility for the proper expenditure and accounting of all funds received and disbursed for the Sponsored Organization’s activities. For those seeking extra credit, you can read the three IRS rulings from the 1960s that establish the fundamentals of these concepts: RR 63-252, RR 66-79, and RR 68-489.
For accounting purposes, all funds received are usually placed in a restricted account or sub-account maintained by the Sponsor, and disbursed either to the Sponsored Organization or directly to third parties for expenses of the Sponsored Organization. All such funds received by the Sponsor must be reported as the income of the Sponsor for both tax and financial reporting purposes, which means that such income might tip the Sponsor into new reporting requirements. For example, if these additional funds bring the Sponsor over the $50,000 threshold in average annual revenue, it must start filing a full Form 990-EZ or 990. Likewise, if the Sponsor has more than 35 Maine donors contributing over $35,000 per year, it must obtain a charitable solicitation license under Maine law. Meanwhile, funds transferred to the Sponsored Organization are typically reported as grant expenses by the Sponsor. The Sponsor typically charges an administrative fee for its services, generally in the 5% to 15% range.
The above summary describes only the most common kind of fiscal sponsorship arrangement, but there are many different variations. Sometimes, the fiscal sponsorship can be with an individual or an unincorporated association instead of a nonprofit corporation, although these arrangements can carry additional risk for the Sponsor. For a thorough overview of the various types of fiscal sponsorships, I recommend the book Fiscal Sponsorship: 6 Ways to Do it Right. Additional resources can be found at fiscalsponsordirectory.org and fiscalsponsorship.com. A Boston-based organization that serves as fiscal sponsor for many organizations throughout New England is TSNE MissionWorks.
MANP has compiled additional resources on fiscal sponsorship in our Answer Center.
Are all funds in a Fiscal Sponsorship raised for the donor considered restricted or can the Sponsor use the funds as it sees fit? I understand the Fiscal Sponsor has complete discretionary control but Im not clear if that means the funds collected for the project are restricted for that project?
Thanks for your question, Nicholas! The author of this post is currently away from his office, but we’ll get back to you.
Hi again Nicholas,
Just following up with more information. While simple on the surface, the answer to your question can get quite complicated because there are practical, legal, and accounting considerations. From a practical perspective, I think it is most common to treat the funds as restricted given donor intent, even if there is legal latitude. That said, we’d recommend consulting with an attorney and accountant for the best advice.