NONPROFIT FISCAL SPONSORSHIP
Many arts organizations are structured as tax exempt, not-for-profit corporations rather than for-profit entities. This allows the entity to seek contributions from donors who can take advantage of the tax-deductibility of qualified charitable donations. However, forming and operating a not-for-profit corporation, and applying for tax-exemption, can be daunting. Also, some artists seek funding for projects that are temporary and do not need to form a corporation that, theoretically, can exist perpetually. A vehicle that enables unincorporated persons or projects to obtain the benefits of charitable donations is fiscal sponsorship.
In fiscal sponsorship in an arts setting, the artist partners with a pre-existing tax-exempt entity, the sponsor. Once the artist finds donors for her project, the tax-exempt entity can accept the donations and provide the donors with the necessary documentation for their tax deductions.
One requirement of fiscal sponsorship is that the intended activity of the artist comes within the declared charitable purposes of the sponsor. For example, an artist could not seek fiscal sponsorship from a tax-exempt hospital. The hospital’s charitable purposes probably do not include arts and cultural activities. The purposes of an entity are found in the Articles of Incorporation that were filed with the State when it was formed. It will not do to simply ask the President or other officer what the entity’s purposes are. The artist needs to confirm that the Articles of Incorporation include arts or cultural activities. Failure to do so could put at risk the tax deductibility of contributions received.
The sponsor has many legal and financial duties and obligations. The sponsor will receive the donations and give the donors the receipts that will be used in claiming tax deductions. The sponsor will pay the suppliers or vendors that the artist needs to pay to implement her project. The artist, quite literally, may never touch a single penny of the donations. The sponsor will maintain financial books and records concerning the donations and expenditures. The sponsor will prepare and file the annual reports and tax returns required by federal and state laws. The sponsor is also required to closely supervise the use of the contributed funds to insure they are used lawfully, efficiently, and for the declared charitable purposes. The sponsor is primarily liable for the use of the funds, both to the donors and to the IRS. The sponsor will keep close tabs on what the artist is doing. If an artist is not comfortable with that kind of supervision, fiscal sponsorship may not be the right choice for the artist.
Entities that are willing to serve as fiscal sponsors are generally not willing to take the next step, that being, finding actual donors for the artist’s project. The artist must still find the donors. However, artists may find that some donors are more comfortable in contributing, knowing that financial management of the artist’s project will be handled by an experienced entity.
A sponsorship should be the subject of a written agreement between artist and sponsor. Sponsors are usually paid for their services, in a range from 3% to 10% of the funds administered. While many sponsorship projects are short-term, sponsorship is also appropriate for the long-term. Sometimes, sponsors don’t just manage finances, but help develop and promote the artist more generally.
Somewhat surprisingly, fiscal sponsorship is rather rare and underutilized. The benefit to artists is obvious, but potential sponsors also benefit by being able to pursue their corporate goals without having to conceive, implement and closely manage suitable projects. Fiscal sponsorship should be explored by both artists and tax-exempt arts entities.
Gary Schuster is an attorney with Jacobowitz & Gubits, LLP, in Walden, New York. The information in this article is for general information purposes only. It is not, nor is it intended to be, legal advice for any particular person or circumstance, or for Internal Revenue Code purposes as described in IRS Circular 230. This article is no substitute for obtaining legal advice from an attorney based on your particular circumstances.