What is the difference between Fiscal agent and Fiscal sponsor?
The terms “fiscal agent” and “fiscal sponsor” have two very distinct legal and tax connotations.
In conducting due diligence to determine whether to utilize a fiscal sponsor or a fiscal agent, it is not enough to simply determine whether the organization is classified as a 501c3 public charity in good standing.
An intrinsically important question is to determine the legal status of the sponsee desiring to be sponsored. Is the entity desiring to be sponsored itself, a 501c3? If the answer is no, then, it is highly unlikely that a fiscal agent relationship is desirable (explained more below). On the other hand, if the entity is in fact a 501c3, a fiscal agent relationship may in fact be completely acceptable.
That being said to really understand this question, one must dig deeper into the meaning and thus distinctions between these two terms as the IRS views them.
The IRS has established certain detailed guidelines for a relationship to be deemed a fiscal sponsorship relationship. Among other things, failure to meet these guidelines will result in the contributions received not being tax deductible.
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
(d) the receiving party must maintain substantiation demonstrating the use of funds
Failure of any one of these elements will result in fiscal agency.
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 receiving entity retains the right to disburse funds and if in its view the disbursement is not charitable in nature, it will simply refuse to make the disbursement.
On the other hand, it is more nuanced with Model C fiscal sponsorship. Under Model C fiscal sponsorship, the parties ensure safeguards of fiscal sponsorship by requiring the sponsee to submit a “pre-approved budget” to the sponsor which contains all the proposed expenditures of the charitable project. At the end of the 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. Provided such substantiation is in line with the budget, this will fulfill the discretion and control test established under the IRS guidelines.
In the case of fiscal agency, a fiscal agent will act as an agent with fiduciary obligations to the contracting entity and the contracting entity must have its own 501c3 status. A fiscal agent relationship can be helpful to small 501c3’s that don’t have the size to substantiate the receipt of large grants. Overall, this is the less common relationship of the two. That being said, if one of the main objectives is to be able to receive charitable contributions, when in doubt, fiscal sponsorship is almost always the best structure to establish.