Can a nonprofit be a fiscal sponsor?
Whether a nonprofit can serve as a fiscal sponsor is a very good question indeed.
It is important to understand that being a nonprofit does not mean that the entity is exempt from taxes nor does it mean that the contributions received are tax-deductible. To supplement, a nonprofit is formed in one of two ways, either it is established as a nonprofit corporation or as an unincorporated association. In either case, if the nonprofit has not sought tax exemption from the IRS, then, it absolutely cannot act as a fiscal sponsor and you should not utilize its services as a fiscal sponsor.
To act as a fiscal sponsor, there are certain IRS guidelines that must be met. If the parties have not met these guidelines, the contributions received for the charitable project will not be tax deductible to the donor. The IRS guidelines require that the receiving entity (a) be a 501c3 public charity, (b), the receiving entity must retain discretion and control of the funds, (c) the activities must be charitable in nature and (d) the receiving party must maintain substantiation demonstrating the use of funds for charitable purposes. Failure of any one of these elements will result in fiscal agency and/ or simply just a contractual relationship exists with no tax benefit to the donors.
An entity retains discretion and control through physical and contractual safeguards. In terms of the two main types of fiscal sponsorship, under Model A, it is quite easy to maintain physical safeguards over the funds as the sponsoring entity retains the right to disburse funds pending a review and consent to each and every disbursement. If the disbursement is not charitable in nature, the entity will simply not disburse funds.
Under Model C fiscal sponsorship, the parties insure safeguards of fiscal sponsorship by requiring the “sponsee” to submit a “pre-approved budget” to Sponsor which contains all the proposed expenditures of the charitable project. At the end of the fiscal sponsorship contract period (or as provided in the contract, usually monthly), the sponsee will provide the sponsor with substantiation of the expenditures per the proposed budget. This insures that the funds are held in the Sponsor’s discretion and control per the IRS guidelines.
Ultimately, a nonprofit can be a fiscal sponsor if it’s a recognized 501c3 public charity and it has notified the IRS that it plans on acting as such and it has been approved to do so.
That being said, there are many “unofficial” fiscal sponsor relationships. They may be classified as a 501c3 but do not exist to solely act as a fiscal sponsor. In fact, they have never disclosed this to the IRS. We do not recommend utilizing such 501c3’s. We advise the use of recognized professional fiscal sponsor relationships where the sole purposes of the 501c3 nonprofit is to provide such services to charitable projects.
Non-professionalized outfits do not know the rules and regulations that may jeopardize the initiative.
Notwithstanding the foregoing, not only should the fiscal sponsor engage in due diligence on your charitable initiative to insure its worthiness for sponsorship but, conversely, the potential sponsee should conduct its own due diligence on the sought after fiscal sponsor umbrella to make sure it finds the right partner. Interviewing more than 1 is very important.