With many not-for-profit entities (NFPs) and programs in distress as a result of the pandemic, the important needs they serve are at risk. Fiscal sponsorship is one option for saving programs when the NFPs that operate them cannot be saved. This article provides an overview of fiscal sponsorship arrangements and key accounting and other considerations for the sponsoring NFP as well as a distinction of fiscal sponsor arrangements from fiscal agency arrangements.
A fiscal sponsorship is an arrangement between an NFP with 501(c)(3) tax-exempt status (the sponsor NFP) and another party without tax-exempt status. Often, the other party is an organization, group, or individual that wants to conduct a charitable project or activity. The fiscal sponsorship arrangement allows donors to make tax-deductible contributions to support the project or activity. In turn, the sponsor accepts the responsibility to ensure that funds are properly spent on tax-exempt activities.
In practice, there are several models for fiscal sponsorship, but all should conform to the following IRS criteria to be tax-deductible:
Contributions are given to a 501(c)(3) tax-exempt organization (the sponsor NFP) that accepts responsibility of the funds for a project or activity that does not have tax-exempt status.
The sponsor NFP uses those funds for a project or activity that furthers the sponsor NFP’s own tax-exempt purpose.
The sponsor NFP retains discretion and control of the funds.
The sponsor NFP maintains adequate records to substantiate the use of the funds for tax-exempt purposes.
A fiscal sponsorship arrangement is different from a fiscal agency arrangement. In a fiscal agency arrangement, the NFP serving as agent receives and disburses funds on behalf of another party’s project or activity. However, the agent NFP has no variance power over how the funds are disbursed. Contributions given to support the project or activity are treated as given directly to that project or activity. As a result, the contributions are only tax-deductible if the other party is a tax-exempt organization.
GAAP Considerations
The sponsor NFP accounts for the sponsored project or activity as one of its own activities. Accordingly, the assets and liabilities of the sponsored project or activity are reported on the balance sheet of the sponsor NFP. The contributions and other revenues and expenses are reported on the sponsor NFP’s statement of activities. Usually, the contributions received for the sponsored project or activity are donor-restricted and reported as an inflow to net assets with donor restrictions.
The accounting for a fiscal sponsorship differs from a fiscal agency arrangement. For a fiscal agency arrangement, the NFP serving as agent records the assets received on its balance sheet, along with an off-setting agency liability. The agent NFP does not record any revenues or expenses for the activity, except for the fees, if any, received for providing the agency services.
Other Considerations
An NFP that is asked to serve as fiscal sponsor should be fully informed of the benefits, costs, and risks. Legal counsel should be consulted for assistance in vetting the sponsorship model that is appropriate for the situation and for drafting the sponsorship contract. Adequate discussions should be held with the sponsored party to confirm that both parties have a full understanding of all details of the arrangement, including any fees the sponsor NFP will receive for providing the sponsorship services.
Source: This resource was adapted from the AICPA Not-for-Profit Industry Developments – Audit Risk Alert, 2021 Edition. © 2021, AICPA. This publication addresses the latest issues and developments affecting auditing and accounting for not-for-profit entities. Visit the AICPA Store for more information or to purchase the Alert.