How to Account for Fiscal Sponsorship – Model B
Posted by: V.Weber
In previous article we have discussed how to account for fiscal sponsorship agreements, specifically Model A fiscal sponsorship (if you would like to read the article – you can do it here). Today, I would like to dive into how to account for fiscal sponsorship agreements under Model B.
Model B fiscal sponsorship can be described as an “independent contractor project”. In this type of fiscal sponsorship relationship the project would still belong to the sponsor (the sponsoring nonprofit), but the actual operations of the project would be run by a separate legal entity. That separate legal entity could be a business or another type of organization, or even a person. The main difference of Model B from Model A is that under Model B – the project is a separate legal entity. Model B fiscal sponsorship also differs from Model C in a way that under Model B the sponsor retains control and ownership of the project, whereas under Model C the project maintain control and ownership of the results of the project. Visually, model B can be represented as a graph below.
Model B Fiscal Sponsorship
Typically, this types of fiscal sponsorship is suitable for a short-term project (very common in art-related industry involving a movie project or an art-show.)
Even though the project is a separate legal entity, depending on the specifics of the project, the sponsor could keep some of the project staff as employees and some as independent contractors. But in its purest form – the entire project is contracted to one legal entity or one person. The relationship between the sponsor and the project should be spelled out in a written agreement. Things to outline in the agreement would be – work performed, deadlines, amounts to be paid by the sponsor, any sponsor fees or administrative charges, ownership of the property to be acquired, who will bear the liability of the project.
I would like to emphasize the importance of having a written agreement in place, especially in a case when intellectual property is involved. If a project consists of one individual running the project, and the individual would like to retain the ownership of the project, this could be viewed by the IRS as an arrangement that was set up to confer a substantial private benefit to a noncharitable beneficiary. This could potentially jeopardize the status of the sponsoring organization.
Tax reporting for fiscal sponsorship organizations – Model B
When it comes to income tax reporting – the sponsoring organization should issue 1099 to the independent contractor and include the amount paid out for the year in its tax return (form 990). The type of tax return filed by the project depends on the legal status of the project (for an individual or sole proprietor it should be form 1040 – schedule C and SE), for corporations form 1120, for partnership form 1065.
Accounting for fiscal sponsorship – financial statements presentation
In terms of accounting this type of fiscal sponsorship is accounted as one of sponsor’s activities with assets and liabilities being recorded on the sponsor’s statement of financial position (balance sheet) and contribution revenue and expenses recorded on the statement of activities (income statement). This is because the sponsoring not-for-profit has retained variance of power (control) over how funds are disbursed.
This type of accounting differs from the fiscal agency arrangement where the nonprofit would only record assets and liabilities on the statement of financial position. In fiscal agency arrangement nonprofit receives and disburses funds on behalf of the agent (another party’s project or activity) and has no variance power over the agency and over how the funds are disbursed. In the fiscal agency arrangement, contributions given to support the project are treated as if they were given directly to the project (or activity), hence these contributions would only be tax-deductible if the other party (the project) is a tax-exempt organization. This can get very complicated and convoluted.
In a scenario of fiscal sponsorship under Model B contributions would be recorded on the sponsoring organization as a restricted contribution, see example of journal entries below.
Fiscal Sponsorship under Model B Accounting Journal Entries
| Dr. | Cash | $100,000 |
| Cr. | Restricted contribution revenue | $100,000 |
The contribution revenue is recorded as restricted. If nothing is spent at year end, the entire amount would be recorded in the restricted net assets and the revenue would be classified as revenue with donor restrictions on the statement of activities.
Then when expenses are incurred on this project (let’s next fiscal year) the following journal entry would be recorded:
| Dr. | Program expense | $50,000 |
| Cr. | Cash | $50,000 |
Then the release of net assets would need to be recorded as well with the following journal entry:
| Dr. | Net assets with donor restriction – released | $50,000 |
| Cr. | Net assets without donor restriction - released | $50,000 |
I would like to emphasize the importance of having a written agreement in place in any fiscal sponsorship relationship. But overall, from the accounting perspective fiscal sponsorship could be accounted as the sponsoring organization’s own activities (with revenue and expenses flowing through the statement of activities) or as an agency organization activity, in which case the sponsoring organization would be considered a pass-through organization and only record the assets and liabilities for these activities on its statement of financial position.
In the next article I will dive into the specifics of fiscal sponsorship under Model C. So, stay tuned for more articles in the next few weeks.
In conclusion, accounting for fiscal sponsorship agreements is very complex and hiring a specialized nonprofit accountant or nonprofit CPA as well as engaging an attorney to draw up a fiscal sponsorship agreement is of paramount importance. If you need help with accounting for fiscal sponsorship from a nonprofit accountant or nonprofit CPA – do not hesitate to contact us directly. At WCC we specialize in not-for-profit accounting, and it is our mission to help mission-based organizations to achieve their mission.