Fiscal Sponsorship

A new initiative wants to accept tax-deductible contributions before it has its own IRS determination letter. A filmmaker is raising funds for a documentary with a charitable purpose. A community group lacks the appetite for the administrative overhead of becoming a legal entity. In each case, the answer is often fiscal sponsorship: the project operates under the umbrella of an existing 501(c)(3), which receives the donations, holds the funds, and takes legal responsibility for how they are spent.

The mechanics vary, but the tax logic is constant. Because the sponsor organisation is the one with exempt status, it is also the one that must exercise real discretion and control over the donated funds. The IRS does not require that fiscal sponsorship follow a particular form, but it does require that what happens in practice matches that control requirement. A sponsor that simply passes every dollar straight through to a project without meaningful oversight is not a fiscal sponsor — it is a conduit, and conduit arrangements can jeopardise the sponsor's own exemption and expose donors to the loss of their deduction.

Two models dominate practice

The arrangement most practitioners call Model A — comprehensive fiscal sponsorship — makes the project an internal programme of the sponsor. The sponsor owns any work product, employs or contracts the personnel, and signs all agreements. The project director reports to the sponsor's leadership. This is the cleanest structure from an IRS standpoint: the sponsor's control is genuine and visible.

Model C — the pre-approved grant relationship — keeps the project legally separate. The sponsor receives restricted contributions designated for the project, then re-grants them once the project has demonstrated that the proposed use meets the sponsor's charitable purposes. The project retains its own legal identity, but the money moves only after the sponsor has exercised independent judgment. The distinction matters because Model C requires that the sponsor be truly deciding whether to make the grant, not rubber-stamping a pass-through. Grant Letter procedures ↗ and related IRS technical guidance have long noted that the absence of meaningful grantee oversight is the recurring fault line in these arrangements.

Most real arrangements sit somewhere in this spectrum, and well-run sponsors — organisations such as Fractured Atlas, the International Documentary Association, or the New York Foundation for the Arts, each of which has operated fiscal sponsorship programmes at scale — maintain written agreements that spell out exactly who controls the funds, who can authorise expenditures, and what happens to remaining money if the project ends.

What the agreement must do

The written sponsorship agreement is not a formality. It should specify that donated funds are held in a segregated account or sub-account of the sponsor; that the sponsor retains the right to redirect funds if the project deviates from its stated purpose; how fees are calculated (a percentage of funds raised is typical, often in the range of five to ten percent, though rates vary widely); and what the termination procedure is. Projects should understand that the funds belong to the sponsor, not to the project director — a fact that Treasury Regulation § 1.501(c)(3)-1 ↗ reinforces by placing the no-private-benefit requirement squarely on the exempt organisation.

State law adds another layer. Several states require that fiscal sponsors register as charitable solicitation organisations in every state where they solicit on behalf of projects, and the National Association of State Charity Officials maintains guidance on which states take the broadest view of that obligation.

The question a sponsor's board should always be able to answer is simple: if a project director stopped cooperating tomorrow, could this organisation take custody of the funds and apply them to charitable purposes without that person's participation? If the answer is no, the arrangement is not fiscal sponsorship in the IRS sense of the word — it is something else, and something riskier for everyone involved.