Fiscal Agent versus Fiscal Sponsorship

Fiscal agent or fiscal sponsor? While they have confusingly similar names, they both have unique advantages that can help nonprofits and increase a sense of community. To know which one is best for you, it helps to know the difference between the two.

Fiscal Agent

A fiscal agent arrangement is usually between a larger nonprofit entity (which becomes the agent because they have capacity/expertise to manage the books), and another entity, usually a smaller nonprofit. While the non-agent entity will fund-raise and request funds, the nonprofit who becomes the agent receives the funds that are awarded and makes disbursements for the non-agent entity. However, the agent does not have a say in how the funds are disbursed. Any contributions received for the non-agent entity are treated as given just to that entity, so they are only tax deductible if that entity (not the agent) is a nonprofit.

Under a fiscal agent agreement only assets and the offsetting liabilities are recorded on the agent’s financial statements. The revenue and expenses are recorded on the non-agent entity’s financial statements, and not included on the agent’s statements. The fee for proving the fiscal agent services is recorded as revenue on the agent’s financial statement and a debit to the fiscal agent liability.

Fiscal Sponsorship

A fiscal sponsorship is an arrangement where a 501(c)(3) nonprofit (that is tax exempt) shares its tax-exempt status with another entity, who does not have tax-exempt status. This arrangement usually happens because the other entity or person wants to do a charitable activity but currently lack 501(c)(3) status. Through the fiscal sponsorship agreement, donations can be made to the charitable activity and are tax deductible. Because they are sharing their tax-exempt status, the nonprofit entity is responsible for ensuring the funds are spent on the charitable activity.

• • For the activity under the fiscal sponsorship arrangement to be considered tax exempt by the IRS there are a few criteria that need to be followed:
  • Contributions are given to nonprofit (who has 501(c)(3) status) and they accept the responsibility of the funds for a project or activity that does not have tax-exempt status.
  • The nonprofit uses those funds for a project or activity that furthers their own tax-exempt purpose.
  • The nonprofit retains discretion and control of the funds.
  • The nonprofit maintains adequate records to substantiate the use of the funds for tax-exempt purposes.

The reporting in a fiscal sponsorship agreement is simple. The nonprofit who is sponsoring the activity records all the assets, liabilities, donations, and expenses on their books and financial statements and as if there were no second entity involved. Usually, the donations for the sponsored charitable activity are 100% donor-restricted for use by the sponsored entity.

In Conclusion

There are key differences between these two arrangements, but the biggest difference is if the sponsoring or agent nonprofit will “share” its tax-exempt status. In a fiscal agent relationship, the non-agent entity reports activity on their own financial statements, where in a fiscal sponsorship the other entity’s activity is all recorded on the sponsoring entity’s nonprofit financial statements because the non-agent entity gets to share the tax-exempt status. Before entering either a Fiscal Agency or Sponsorship it is important to evaluate the reporting and tax consequences of both options.

When you have nonprofit accounting questions, contact Caroline Russell, CPA, Manager or the team here at Mahoney. We are happy to be of help to you in any way.