Posted on Wednesday, October 24, 2012
A fiscal sponsorship exists when one organization, the “fiscal sponsor” shares its tax exempt status with another organization, the “fiscal agent”. The fiscal sponsor is usually an established organization that must have already received its tax exempt status from the IRS. The fiscal agent is normally a newly formed nonprofit organization and has not yet received its tax exempt status.
Before a 501(c)(3) organization becomes a fiscal sponsor, it should make sure that the potential fiscal agent’s mission is consistent with the its own mission and does not jeopardize its tax exempt status. Under a fiscal sponsorship relationship, the fiscal agent becomes an integrated part of the fiscal sponsor. The fiscal sponsor receives tax deductible contributions on behalf of the fiscal agent, and the receipt and use of these funds is reported on the fiscal sponsor’s tax return to the IRS. The fiscal sponsor is both fiscally and legally liable for the actions of the fiscal agent and thus, exercises control over its actions and funding to safeguard itself from losing its 501(c)(3) status.
The amount of services and support provided by the fiscal sponsor varies. Usually the fiscal sponsor performs administrative functions for and collects contributions on behalf of the fiscal agent, and in exchange charges an administrative fee based on the fiscal agent’s revenues. The responsibilities of each organization should be set out in a written agreement that includes the fiscal sponsor is responsible for all legal compliance relating to receiving, reporting and acknowledging charitable contributions. The administrative fee to be charged should also be included in the written agreement.
Organizations that most benefit from fiscal sponsorships are:
Newly formed nonprofit organizations waiting to receive their tax exempt status.
New formed nonprofit organizations that want to test out the success of an idea before taking the leap to become their own organizations.
Small nonprofit organizations that find it beneficial to have the support of a well established nonprofit to provide administrative services, as well as legal and financial oversight.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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