Charitable ventures often partner with a fiscal sponsor or a fiscal agent to get their project off the ground and running. Some of the benefits of these types of partnerships are the administrative support, and time and money saved.
If you’ve started researching these options you have likely seen that the term, fiscal sponsor and the term, fiscal agent or fiscal agency, are often used interchangeably. Despite this trend, the two are very different, and misunderstanding the differences can have undesired legal and tax implications.
The critical tax difference between a fiscal agent vs fiscal sponsor is this: Donations to a project with a fiscal sponsor are tax deductible. Donations to a project with a fiscal agent are not always tax-deductible.
What is a fiscal sponsor?
A fiscal sponsor is a tax-exempt 501(c)(3) organization that lends its tax-exempt status and other benefits to a charitable project for the short or long term. The sponsored project may or may not have its own tax-exempt status, though non-exempt projects are more common.
Fiscal sponsorship is appealing because donations to the project are tax deductible for the donors. Oversight and fund management are provided by the sponsor, who ensures that the project owners apply the funds to the mission. In this sponsor-sponsee agreement, the fiscal sponsor ultimately has control over the funds and assists or fully manages back-office administration. This type of agreement is helpful for all-volunteer-run organizations, or those needing to outsource certain compliance and administrative responsibilities.
If focusing on the mission and saving time is a priority for your project, then consider fiscal sponsorship. Just note that fiscal sponsors are sometimes referred to as fiscal agents, so it is important to be clear about the status of the sponsor, and the terms before entering into an agreement.
A fiscal sponsor will
- Have tax-exempt status
- Retain financial and legal control of the project and funds
- Receive and disperse the funds directly to the project for mission-purposes
- Maintain oversight of the project
A fiscally sponsored project will:
- (Most likely) Not have its own 501(c)(3) tax-exempt status
- Work directly on the mission/cause at hand
- Receive funds and oversight from the fiscal sponsor
- Receive tax-exempt status for donations from the sponsor
Last, but not least, a great fiscal sponsor will champion the project and provide tangible benefits like maintaining financial records and administrative tasks.
What is a fiscal agent?
A fiscal agent is a tax-exempt nonprofit organization that ‘sponsors’ a charitable project. The project is commonly that of a smaller, nonprofit organization looking to benefit from the administrative support of a larger nonprofit (the fiscal agent). In this type of agreement, the agent or agency does not have control and decision-making power over the funds.
Donations to sponsored projects under a fiscal agent are not usually tax deductible. For this reason, using a fiscal agent tends to be more beneficial for projects that already have their 501(c)(3) status.
If the project does not have 501(c)(3) status, then using a fiscal sponsor, instead of a fiscal agent, might be more beneficial.
A fiscal agent will
- Have tax-exempt status
- Have limited financial and legal oversight of the project
- Receive and disburse funds to the project
The project will:
- Retain control and legal ownership of funds and activities
- Receive their funds from the fiscal agent
- Work directly on the mission at hand
- Donations received from the fiscal agent will not be tax deductible, unless the project already has its own 501(c)(3) status
Fiscal agent vs fiscal sponsor
The distinctions between fiscal sponsors and fiscal agents mostly center around two key factors.
- Who has ownership and legal control of assets
- Tax-deductibility of donations received
Consider the tax status of your charitable project and which agreement would benefit you most. Ask yourself these questions:
Does my project have 501(c)(3) status?
If the answer is no, then the tax benefit of working with a fiscal sponsor is right for your project.
As we’ve covered, funds contributed to a non-exempt project that has a fiscal sponsor are tax-deductible to the donor. Having tax-exempt status will give your project an edge in grant access and donor contributions. Remember, funds contributed to a non-exempt project with a fiscal agent are not always tax deductible.
Do I need to have absolute control and legal ownership over assets and funds?
Fiscal agents do not have legal control and decision-making power over your project. This is a ‘pass-through’ type of agreement, usually sought by smaller tax-exempt nonprofit organizations that are looking for help with administrative tasks.
In comparison, a fiscal sponsor does have control and decision-making power over sponsored projects, which is usually seen as a bonus. The oversight protects the sponsor and the project and ensures that funds are going towards the project mission. Once again, this agreement is usually sought by charitable projects lacking tax-exempt status, or new nonprofits seeking administrative relief.
Using a fiscal sponsor or a fiscal agent can quicken the ‘speed to market’ for charitable projects and be an all-around great choice for nonprofit ventures.