Is There an Alternative To Applying for Tax-Exempt Status?
Smaller New York nonprofits should consider finding a fiscal sponsorBy Doug Mentes, Esq. | Last updated on January 11, 2023
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What Is Fiscal Sponsorship?A solution to these problems could be by piggybacking the tax-exempt status of an established NPO through fiscal sponsorship. Any tax-exempt public charity, deemed exempt by the Internal Revenue Code Section 501 (c) (3), can serve as a fiscal sponsor. To ensure the fiscal sponsor does not risk its tax-exempt status, the relationship between the sponsor and non-exempt project or organization must meet the following requirements to satisfy the IRS:
- Sponsor agrees to accept donations and fundraising on behalf of non-exempt entity
- Sponsor retains supervision and control of donated funds
- Sponsor ensures donated funds are used in manner that furthers the sponsor’s own mission
- Comprehensive sponsorship, or Model A, involves the least financial independence of the project or not-yet-exempt organization. The project does not exist on its own, but is a part of the sponsor’s organization.
- Pre-approved grant, or Model C, typically involves the sponsor accepting grants or funds for the project, and then re-granting those funds to the project. The project retains status as a separate entity.
How To Choose a Fiscal Sponsor?At the outset, non-exempt organizations should expect to pay a fee towards the services of the fiscal sponsor—usually a percentage of the granted donations. What determines a fair fee will depend on many factors, including the amount of administrative duties handled by the sponsor. The New York attorney general provides information for nonprofits that serve as fiscal sponsors, and you can find directories of fiscal sponsors online. Those searching for a sponsor should first look to sponsors that have a similar mission. They should then contact potential sponsors to find out answers to common questions, including:
- What is the sponsor’s fee?
- When can I begin the project?
- How can I terminate the agreement?
- Can the project seek its own 501(c)(3) status?
- What services are provided?
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