Navigating Fiscal Sponsorship
Due to the negative effects of the pandemic on many not-for-profit entities (NFPs), fiscal sponsorship has become a practical solution to keep essential programs running. This strategy helps maintain crucial community services and allows donors to continue making tax-deductible contributions.
Definition and Mechanism: A fiscal sponsorship is a formal arrangement where a tax-exempt NFP (the sponsor) partners with an organization, group, or individual without tax-exempt status to support a charitable project. This structure allows the sponsor NFP to accept and manage charitable donations on behalf of the non-exempt entity, ensuring that funds are used exclusively for tax-exempt activities.
Key Features of Fiscal Sponsorship:
- Tax-Deductibility: Donations are made to the sponsor NFP and are tax-deductible because the sponsor manages the funds according to IRS criteria, ensuring they further its tax-exempt purpose.
- Control and Accountability: The sponsor NFP retains full control and discretion over the funds, with a responsibility to maintain detailed records that substantiate the taxexempt use of all contributions.
Distinction from Fiscal Agency:
Unlike fiscal sponsorships, a fiscal agency arrangement involves an NFP acting as an agent that processes funds for a third-party project without the ability to direct or control the use of those funds. Contributions in this model are only tax-deductible if the project itself is a tax-exempt organization.
GAAP Accounting Implications:
- Fiscal Sponsorship: The sponsor NFP reports the assets and liabilities of the sponsored project on its balance sheet and records contributions and expenses as part of its own financial activities, often as donor-restricted funds.
- Fiscal Agency: The agent NFP records received assets and an equal agency liability on its balance sheet and does not recognize these transactions as revenue or expenses, except for any service fees.
Operational Considerations:
- Risk Assessment and Legal Guidance: NFPs considering serving as fiscal sponsors should evaluate the benefits, costs, and risks associated with sponsorship arrangements. Consulting with legal counsel is essential to develop an appropriate sponsorship agreement and understand the contractual obligations involved.
- Collaboration and Communication: Effective communication with the sponsored party is crucial to clarify the terms of the sponsorship, including any fees for administrative services provided by the sponsor NFP.
Fiscal sponsorship offers a strategic avenue for NFPs to support charitable initiatives while enhancing their financial and operational resilience. By adopting this model, NFPs can extend their impact, ensure compliance with tax laws, and maintain the trust of their donors and stakeholders.
More from This Series
Part I: Accounting and Auditing Update | Summer 2024
Part II: Tax and IRS Update | Summer 2024
Part III: Government Auditing Standards Update | Summer 2024
