Sometimes a nonprofit will be asked to act as a fiscal sponsor for another group which wants grant funding, or to allow use of its tax exempt status to facilitate contributions to another group or individual. The “fiscal sponsor” relationship is often assumed to be simple. It isn’t, so if you’re considering entering into this arrangement from any role, read this article first.
While a fiscal sponsor relationship can be beneficial to the sponsor, the funder and the ultimate recipient, it must be approached carefully to avoid both IRS problems and misunderstandings among the parties involved. In the past this has been called a “fiscal agent” or a “pass-through” relationship, but these are not good terms to use — they raise questions with both the IRS and auditors, and they can create misunderstandings among the partners.
If a nonprofit is considering entering a fiscal sponsorship, as either the SPONSOR or the sponsored group (referred to as the PROJECT), there are a few conditions which must be met:
- The sponsor must maintain fiscal control and some degree of program control.
- The project must be within the sponsor’s mission as set forth in its articles of incorporation, bylaws and original 501(c)(3) application papers (Form 1023).