From the website of The National Council of Nonprofits
What is Fiscal Sponsorship?
Fiscal sponsorship refers to a relationship in which one organization that is tax-exempt serves as the official recipient of charitable donations for another organization that is not yet recognized as tax-exempt. In this relationship the organization that has tax-exempt status is the "fiscal sponsor" and the organization that (usually) does not have tax-exempt status (and may not even by incorporated) is the sponsored organization. Typically the sponsored organization seeks out a fiscal sponsor that has a similar or consistent mission. There are some charitable nonprofits that actually have as part of their mission to serve as fiscal sponsors -- they may even refer to themselves as "incubators" of other nonprofit programs. Read about finding fiscal sponsors.
What Does the Fiscal Sponsor Do?
The role of the fiscal sponsor can include performing many different administrative functions on behalf of the sponsored group, including taking on the responsibility of receiving and administering charitable contributions on behalf of the sponsored organization. Since the donations are made directly to the fiscal sponsor, which then provides funds to the sponsored program, this arrangement enables donors to -- in essence -- make tax-deductible contributions to support the activities of the sponsored organization. In many sponsorships the fiscal sponsor charges an administrative fee for its services, usually a percentage of the budget of the sponsored organization or program. Although this arrangement appears to be a "run-around" of tax regulations that provide donors a deduction for their charitable gifts, in actuality the IRS has blessed the function of fiscal sponsors, as long as the fiscal sponsor retains the right to voluntarily determine how to use the funds that the donor contributes.
Why Choose Fiscal Sponsorship?
Fundamentally, fiscal sponsorship allows a program or organization that does not yet qualify as a recipient of deductible contributions to raise funds for its operations that will be tax-deductible to donors. (As background: Donors are not able to receive a deduction for a contribution to a nonprofit that is not recognized as tax-exempt. See IRS Publication 557. Additionally, the guidelines of most private foundations explicitly require grantees to be recognized as tax-exempt by the IRS. Consequently, groups that are not formally recognized by the IRS as tax-exempt may not be eligible for certain contributions.) Having a fiscal sponsor can benefit a group that is not tax-exempt by providing a pathway for it to receive funding.
Fiscal sponsorship can be used by newly formed charitable organizations that have the need to raise money right away, before they are recognized as tax-exempt by the IRS.
Fiscal sponsorship might be chosen by a newly formed nonprofit that seeks to test-drive its ideas, or operate less formally than what is required of groups that make the commitment to apply for tax-exempt recognition from the IRS.
Some organizations remain in a fiscal sponsorship relationship for a long time, deciding that their mission can be achieved in that structure without the need to be recognized by the IRS as an independent tax-exempt entity.
Finally, some organizations - including those that are tax-exempt - find that utilizing a fiscal sponsor to outsource administrative responsibilities, whether back-office tasks, or those relating to fundraising and disbursement of funds, are the right business model for them.
How Does Fiscal Sponsorship Work for Fundraising?
A newly formed nonprofit finds another nonprofit (one that is already tax-exempt and generally has a similar mission) that agrees to accept the administrative responsibility of receiving charitable gifts on behalf of the sponsored organization. The fiscal sponsor must first determine that serving as a fiscal sponsor is consistent with its mission (and does not jeopardize its own tax-exempt status). The sponsored organization arranges with the fiscal sponsor to receive grants or contributions on its behalf. This arrangement allows the sponsored organization to solicit contributions to support its programs, with the understanding that the donation will be made to the fiscal sponsor, not to the sponsored program/organization directly. Since the fiscal sponsor is tax-exempt, the donor’s contribution will qualify as a deductible contribution
Using a fiscal sponsor satisfies IRS requirements as long as the fiscal sponsor maintains the right to decide, at its own discretion, how it will use the contribution, and in fact uses it consistently with its own tax-exempt status. Generally there is no question but that the sponsor will grant the contribution (minus an administrative fee if one applies) to the sponsored organization - but it could decide to use the funds elsewhere. Maintaining such control over the donated funds is a requirement of a legitimate fiscal sponsor arrangement.