We just received a grant request from a group that is not a public charity. The request states that the group has a “fiscal sponsor” and the grant agreement is countersigned by the fiscal sponsor? Can we make this grant?
Yes. A grant to a public charity serving as a fiscal sponsor is treated like any other grant to a public charity. However, you must perform your due diligence to make sure the fiscal sponsor is truly serving as a sponsor and not simply a conduit for the grant.
What is a fiscal sponsor?
A fiscal sponsor is a public charity that has entered into a relationship with a non-charity to assist with a charitable project. Non-charities that use fiscal sponsors could include a group of individuals, a chamber of commerce, a civic group, a non-U.S. based organization, or a new charity that the IRS has not yet recognized as a public charity.
Fiscal sponsorship relationships vary in structure. For example, the non-charity’s project could become a direct project of the fiscal sponsor. More commonly, the fiscal sponsor could pre-approve the non-charity’s project and then assist with fundraising. Regardless of the arrangement, the fiscal sponsor is responsible for investigating the project to make sure it serves a charitable purpose and for exercising discretion and control over the granted funds. The fiscal sponsor and project will likely have a written agreement about the terms of their relationship.
Why would a potential grantee have a fiscal sponsor?
Typically, a potential grantee partners with a fiscal sponsor because the potential grantee is not an IRS-recognized public charity. It is frequently difficult for a non-charity to raise financial support from individuals, corporations, and private foundations. For that reason, a non-charity may partner with a public charity that can receive the grant funds and then re-grant the support to the charitable project.
What is the advantage for a corporate grantmaker to make a grant to a fiscal sponsor?
If a private foundation makes a grant directly to a non-charity, the private foundation must follow an expenditure responsibility process. This multi-step process includes a pre-grant inquiry, a written grant agreement, follow-up reports from the grantee, and additional information about the grant on Form 990-PF. A grant to a public charity fiscal sponsor does not require this formal oversight and monitoring procedure because the IRS has already recognized its activities as charitable.
For a corporate giving program, a grant to a fiscal sponsor may mean the difference between receiving and not receiving a charitable tax deduction for the grant. Since grants to non-charities are not eligible for charitable tax deductions, a grant to a fiscal sponsor for a charitable project allows a corporation to obtain such a deduction, even though the ultimate recipient is not a charity.
What are the concerns when considering a grant to a fiscal sponsor?
Making a grant to a fiscal sponsor that simply serves as a conduit will result in the IRS treating the grant as one to a non-charitable project. For a corporate foundation, this would likely result in an excise tax. For a corporate giving program, no charitable deduction would be allowed for the grant. Performing your due diligence will help to avoid such a result.
To take advantage of the benefits of making a grant to a fiscal sponsor, a corporate grantmaker should perform the same level of due diligence it performs on a public charity grantee along with enough additional research to know that the fiscal sponsor is not simply receiving money and passing it on to the project without any discretion. This could involve steps such as seeing the agreement between the parties and having discussions with the fiscal sponsor about its role.
Understanding fiscal sponsorships can provide corporate grantmakers with more flexibility to fund innovative projects that may not be direct projects of public charities but are no less charitable. For more information on such grants, see “Fiscal Agency Versus Fiscal Sponsorship” by Jane Nober and Fiscal Sponsorships: Six Ways to Do It Right by Greg Colvin.