The National Network of Fiscal Sponsors held its Annual Gathering in Brooklyn on November 7. Approximately 100 leaders of fiscal sponsors from across the country came to learn about common issues, best practices, and new developments, and to share experiences.
Fiscal sponsorship refers to a contractual relationship that allows a person, group, or taxable entity to advance charitable or other exempt activities with the benefit of the tax-exempt status of a sponsor organization. The most common models of fiscal sponsorship are:
- Comprehensive (Model A), in which the assets, liabilities, and exempt activities collectively referred to as the project are housed within the fiscal sponsor, and
- Pre-approved grant relationship (Model C), in which the project is run by a separate entity funded by the fiscal sponsor.
Fiscal sponsors must consider in their plans and operations: technology, demographic changes, globalization, social and racial justice movements, and the sharing economy. These major forces provide both opportunities and threats. Among some of the other trends we discussed at the Gathering:
Social Enterprises & Impact Investing
The rise of for-profit social enterprises and broader social good movement are particularly noteworthy. Social enterprises (including hybrid organizations like the benefit corporation and L3C) may be promising collaborative partners, commercial co-venturers, supporters, and donors. Social entrepreneurs may also look at a fiscally sponsored project as an alternative to starting a nonprofit affiliated with their social enterprise. Further, hybrids can be used as vehicles for cross-sector joint ventures. However, they also represent competition to nonprofits for talent and dollars.
Impact investing and the new rules recognizing mission-related investments (MRIs) provide opportunities for fiscal sponsors to attract contributions intended to make MRIs in social enterprises. Fiscal sponsors would be wise to understand how to utilize MRIs and avoid conferring upon any person or entity a prohibited private benefit.
Crowdfunding is an increasingly attractive fundraising vehicle, but fiscal sponsors must understand the rules and risks along with the potential benefits. They should ensure authorized, truthful, and accurate communications; use of properly registered or exempt crowdfunding platforms; registration in states, as required (see Charleston Principles); and proper donation receipts, including when something of value is provided to a contributor in return for the gift.
Fiscal sponsors must also recognize the competition provided by individuals or groups using crowdfunding for charitable purposes without a 501(c)(3) organization. Contributors to such campaigns will generally not be entitled to a charitable contribution deduction and may be angry at the nonprofit represented as the beneficiary of the campaign. Nevertheless, many people will continue to support crowdfunding campaigns regardless of the tax-status of the beneficiary or the deductibility of the contribution.
IRS Form 1023-EZ
IRS Form 1023-EZ was released in July 2014 as an alternative short form for small organizations applying for exemption under 501(c)(3). The Form, which has been widely criticized by state charity officials and exempt organization professionals (including this one), is credited with reducing the 60,000+ application backlog that had caused common delays of determinations lasting one year and longer. The number of approvals of 501(c)(3) status in fiscal year 2014 (94,365) more than doubled the two previous years combined, and only 67 applications were disapproved. The principal reason for the criticism is that the application appears more like a self-certification than a true application to be vetted by the IRS. It’s not surprising that the processing time of Forms 1023-EZ has reportedly been as short as 2-4 weeks (though the IRS states to expect up to 90 days). But the lack of vetting has resulted in even for-profit corporations receiving favorable 501(c)(3) determinations because they checked the right boxes regardless of whether they actually qualified.
The lower barrier to obtaining 501(c)(3) status and shortened processing time may make it easier to start a nonprofit than get fiscally sponsored. Accordingly, what was once an advantage for fiscal sponsorship may now be a disadvantage in many cases. Yet, it can be pointed out to project founders and steering committees that a determination letter in response to a Form 1023-EZ can be distinguished from a determination letter in response to the full Form 1023. And funders may begin to give weight to this factor, particularly when problems associated with the Form 1023-EZ begin to surface.
Compliance / Scandals
Best practices (such as the guidelines published by NNFS for comprehensive and pre-approved grant relationship) are helping strengthen the reputation of fiscal sponsorship. Stories of fiscal sponsorship done right are similar helpful, but the media tends to favor the bad stories like this one. The “scandals” lead to drafting of legislation and/or regulations to help prevent fiscal sponsors from serving as mere conduits for monies to flow from donors and grantmakers to for-profits. Fiscal sponsors need to better educate the media, the general public, and funders about the valuable public benefit created by fiscal sponsorship. Fiscal sponsors may also want to consider listing their largest comprehensive fiscally sponsored projects on the Form 990 to evidence transparency and counter the argument that fiscal sponsors are used to “hide” bad projects.
Lobbying and Political Activities
501(c)(3) fiscal sponsors with comprehensive projects that lobby must be careful about complying with state and federal political registration and reporting requirements in addition to federal tax law limitations. They should also be aware of their potentially generous lobbying limits under 501(h) (assuming they made the very easy and generally highly recommended election) and not be overly conservative in limiting lobbying activities of their projects so long as they have the capacity to comply with the registration and reporting requirements. Similarly, fiscal sponsors should understand the political activities permissible to a public charity and not discourage their projects from such activities (e.g., voter education, issue advocacy, voter registration, get-out-the-vote drives). See Rules of the Game.