Last Updated on Feb 17, 2020 by James W
In the nonprofit world, one would always hear the terms fiscal sponsorship and fiscal agencies thrown around. This article focuses on differentiating the two terms.
When discussing nonprofit organizations in their start-up phase, it isn’t uncommon to hear the terms “fiscal sponsorship fund”, “fiscal sponsorship”, and “fiscal agency” being thrown around. The problems arise when they’re used interchangeably even when they shouldn’t be. This has caused a widespread misunderstanding regarding the proper usage of these terms.
Diving into the definitions and distinctions between these terms allows charity groups to make more informed decisions about the direction to take for their charity projects.
What is a Fiscal Sponsorship and a Fiscal Sponsorship Fund?
The terms fiscal sponsorship and fiscal sponsorship fund obviously come hand-in-hand with each other.
A fiscal sponsorship is basically an arrangement between a non-profit organization that has been granted 501 (c)(3) tax-exempt status and a charitable project that hasn’t been granted the same 501 (c)(3) tax-exempt status as the nonprofit has. This charitable project is usually new, run by a group or an individual, supporting or fighting for a similar cause as the one the nonprofit supports/fights for.
The arrangement allows the tax-exempt nonprofit, the sponsor, to collect and accept the funds on the charitable project’s behalf. The sponsor is put in control of the project as it becomes responsible for proper fund allocation – ensuring that the funds that have been collected are properly spent towards achieving the project’s goals.
A fiscal sponsorship is the best arrangement for temporary charitable projects and those set up by groups or individuals who aren’t sure if going the non-profit organization route is for them.
Fiscal Sponsorship Fund
Given the definition of a fiscal sponsorship above, a fiscal sponsorship fund is a pool of all the funds raised by the tax-exempt non-profit organization for the specific charitable project they are in an arrangement with.
What is a Fiscal Agency?
Like a fiscal sponsorship, a fiscal agency is also an arrangement between an established, tax-exempt non-profit organization and a charitable project. The difference between the two lies in the terms of the arrangement: instead of being a “sponsor”, the nonprofit is to act as a legal agent for the charitable project.
Unlike a fiscal sponsor, however, a fiscal agent doesn’t retain discretion and control. The agent acts on behalf of the project but they don’t have control over the project’s spending.
A fiscal agency is the best arrangement for small, tax-exempt non-profit organizations that wish to provide legal oversight or administrative support to other organizations.
Main Difference Between Fiscal Sponsorships and Fiscal Agencies
The biggest difference between fiscal agents and fiscal sponsors lies in the tax treatment of the funds raised with these arrangements. In a fiscal sponsorship, the funds raised by the sponsor are tax deductible. In a fiscal agency, the funds raised are not.
Because of this key difference, it comes to no surprise that many would choose to get into fiscal sponsorship arrangements than fiscal agency arrangements. However, not all organizations are able to meet the criteria or requirements that the IRS has for fiscal sponsorships so they end up going into agency arrangements instead.
IRS Criteria for Fiscal Sponsorships
For an arrangement to be considered a fiscal sponsorship and have the fiscal sponsorship fund tax-deductible, organizations should ensure that their relationship with their intended sponsor should meet the following criteria:
Of course, the fiscal sponsorship must stay true to its definition. It must be an arrangement between a 501(c)(3) tax-exempt non-profit organization to act as the sponsor, and a project that has not been granted a 501(c)(3) tax-exempt status to be the beneficiary.
All grants and donations of funds made towards the project should be directed to the sponsor.
The sponsored project is typically short-term or are planning to pursue their own 501(c)(3) tax-exempt status later on.
The sponsor is responsible for the usage of the funds collected for the project. They’re basically the guardians of these funds as they have full discretion and control as to the use of the funds collected.
Despite having full discretion as to the use of the funds collected, the sponsor should still use the said funds to further their own tax-exempt purpose.
This means that the vision of the sponsor and the sponsored group/charitable project should be in line with each other.
Aside from being responsible for the collection and direction of funds, the sponsor should also properly document the use of the funds for appropriate 501(c)(3) purposes. A record must be maintained for this.
What Happens When the Criteria Are Not Met?
The IRS is pretty strict about these criteria. If they are not met, then any donation of funds made to a fiscal sponsor will be counted as a straight donation towards the project. Since, by definition, the project has not been granted 501(c)(3) tax-exempt status, the donation of funds will not qualify for a charitable tax deduction.
This is why it’s very important for fiscal sponsors and their sponsored projects to understand the nature and terms of their relationship and ensure its documentation in a written arrangement.
Choosing a Fiscal Sponsor
If you’re planning on starting a charitable project, choosing to raise funds via a fiscal sponsorship would be the more appealing option as compared to raising funds with a fiscal agency given that the former allows funds to be tax-deductible.
Choosing a fiscal sponsor, however, is not an easy feat. For one, you have to establish a relationship that thoroughly meets the given IRS criteria for fiscal sponsorships.
The most important factor you should consider when choosing a sponsor is their overall vision. You wouldn’t want to align yourself with an organization that has a completely different vision as your charitable project. It not only disqualifies the funds you raise from being tax-deductible, giving full control of your funds to an organization you don’t see eye-to-eye with is just a recipe for disaster.