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Fiscal Sponsorship for Charity
Published Date : January 26, 2024
Donor-advised funds (DAF) have become increasingly popular in recent years for individuals supporting various ongoing philanthropic causes, especially given their ease of achieving a potentially large tax-deductible contribution in any one given year but then allowing for the payout of possibly many different underlying charitable donations to occur over time (see “Hassle–Free Philanthropy”). For example, maybe someone gets more taxable income than expected late in the year, and then wants to donate some of that new wealth but doesn’t have sufficient time to do any related philanthropic research before year end. Instead, they can fund a DAF, get that possibly generous current-year tax deduction for the fair market value of the gift (if itemizing), and then take their time to decide how to distribute (or grant) the funds over time. Oftentimes, though, many DAF donors want to then help special unique causes or projects, or new charities that have not yet received IRS approval to function as a qualified 501(c)(3) organization; in turn, this can result in such targeted support being rejected or delayed, causing frustration for the donor and recipient charity alike. This is where “fiscal sponsorship” can be helpful.
DAFs are required to make sure that all grants go to qualified charities, and thus sometimes they can’t complete grant requests (or it might take up to a year or more before they can). This sort of thing does not usually happen to well-established charities like the local museum or symphony, but rather the new, small “mover and shaker” type charitable entity, or perhaps something that will be more short-lived and thus not worth the effort of becoming a standalone qualified charity. A fiscal sponsorship involves an existing 501(c)(3) nonprofit offering to provide its tax-exemption and associated benefits to another group (the sponsored partner), usually a charitable project. The project should generally be aligned with the overall mission of the sponsoring charity. Frequently, these projects are small, temporary, community-based activities and it makes little sense for them to try to formally incorporate at the state level and then apply for IRS 501(c)(3) status for a project that might wind down in just a few years. Or, it’s a new charity, struggling to get going and needing support but possibly having to wait a year or more just to get incorporated and receive an IRS letter of determination (all the while not getting direct DAF grants because they simply aren’t allowed to receive them).
Fiscal sponsorships are a great way for temporary or smaller charitable projects to operate with most of the same benefits available to organizations with 501(c)(3) status. If properly structured, all parties can be well served. Donors to the project direct their grant to the sponsor (to meet the required grant qualifications of the DAF), and the sponsor then manages those funds on behalf of the project, typically for a fee. The sponsoring charity will not directly operate the project, but it is responsible for reasonable oversight and for assuring that the activities of the underlying projects fulfill their charitable purpose. This whole arrangement reduces the project’s costs, conserves its resources, reduces duplication of personnel, and simplifies organizational function. If done well, a fiscal sponsorship acts as a testing ground for a new idea or a new nonprofit, while utilizing the administrative resources of the sponsor. Indeed, in many cases, fiscal sponsorship can offer a valuable alternative to starting a nonprofit. It is a practice that has evolved as an effective means of supporting new charitable initiatives, whether temporarily or longer term.
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