Over the years, I’ve fielded countless questions about fiscal sponsorship, a type of arrangement has become a growing part of the nonprofit world. Recently, I collaborated with the Maine Association of Nonprofits to establish a sparkling new and improved Maine Fiscal Sponsorship Agreement Annotated Template.
As the term is generally used, fiscal sponsorship refers to an arrangement whereby a recognized 501(c)(3) nonprofit provides certain fiscal services for an organization that is not a 501(c)(3). The chief reason animating most fiscal sponsorships is to allow the non-501(c)(3) organization to piggyback on the501(c)(3)’s eligibility to apply for private foundation grants and to offer charitable deductions to individual and business donors.
Although there is very little formal law that guides fiscal sponsorship, the overriding concern of the Internal Revenue Service is that the arrangement not be a simple “conduit” or “pass-through,” whereby the Sponsor collects checks or signs grant applications and then simply passes on any money received from donors or grant funders. Rather, the IRS requires that the Sponsor provide meaningful oversight of the Sponsored Organization’s activities, to ensure that these activities further the tax-exempt charitable (or educational, religious, etc.) purposes of the Sponsor. In IRS legalese, any funds collected and disbursed by the Sponsor must be “subject at all times to the ultimate direction and control” of the Sponsor. Thus, the Sponsor legally assumes responsibility for the proper expenditure and accounting of all funds received and disbursed for the Sponsored Organization’s activities. For those seeking extra credit, you can read the three IRS rulings from the 1960s that establish the fundamentals of these concepts: RR 63-252, RR 66-79, and RR 68-489.
For accounting purposes, all funds received are usually placed in a restricted account or sub-account maintained by the Sponsor, and disbursed either to the Sponsored Organization or directly to third parties for expenses of the Sponsored Organization. All such funds received by the Sponsor must be reported as the income of the Sponsor for both tax and financial reporting purposes, which means that such income might tip the Sponsor into new reporting requirements. For example, if these additional funds bring the Sponsor over the $50,000 threshold in average annual revenue, it must start filing a full Form 990-EZ or 990. Likewise, if the Sponsor has more than 35 Maine donors contributing over $35,000 per year, it must obtain a charitable solicitation license under Maine law. Meanwhile, funds transferred to the Sponsored Organization are typically reported as grant expenses by the Sponsor. The Sponsor typically charges an administrative fee for its services, generally in the 5% to 15% range.
The above summary describes only the most common kind of fiscal sponsorship arrangement, but there are many different variations. Sometimes, the fiscal sponsorship can be with an individual or an unincorporated association instead of a nonprofit corporation, although these arrangements can carry additional risk for the Sponsor. For a thorough overview of the various types of fiscal sponsorships, I recommend the book Fiscal Sponsorship:6 Ways to Do it Right. Additional resources can be found at fiscalsponsordirectory.org and fiscalsponsorship.com. A Boston-based organization that serves as fiscal sponsor for many organizations throughout New England is TSNE MissionWorks.
Not exactly breaking news, but many nonprofit organizations are still not aware of newfound eligibility for the Employee Retention Tax Credit (ERTC) in the December 2020 Covid relief bill. Previously, if an organization received a Payroll Protection Program loan or grant, it could not also receive the ERTC.T hat prohibition was eliminated retroactively, so many nonprofits who were ineligible should now check to see if they can benefit from the ERTC.
The ERTC is refundable tax credit against the employer’s share of Social Security tax for a percentage of the qualified wages they pay to employees in 2020 and the first two quarters of 2021. Qualified wages are capped at 70% and limited to$10,000 per employee per calendar quarter in 2021. Thus, the maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021. That said, there can’t be any double dipping, i.e., claiming PPP forgiveness and the ERTC for the same payroll expenses.
For all the important details, see this essential summary from the Maine Association of Nonprofits.
As you may recall, the original federal Covid relief bill established a $300universal (“above-the-line”) charitable deduction for non-itemizers in 2020. In the December 2020 relief bill, Congress extended this deduction through 2021and expanded the cap to $600 for joint filers. There will likely be pressure to make this universal charitable deduction permanent, so stay tuned for more updates. Although most donors are motivated by a desire to do good and not by tax deductions, charities might wish to promote this extended and expanded benefit in communications with your supporters, as an extra enticement. More details here.
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I send E-Bulletins 3 or 4 times per year to provide updates and analyses on legal and policy matters respecting Maine land conservation. I do my best to keep my messages brief, timely, and useful to conservation-minded landowners, as well as land trust professionals and volunteers. At the same time, no one should rely on these E-Bulletins as legal advice, and I encourage you to consult a qualified attorney for advice on any particular situation.
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