How to Account for Fiscal Sponsorship – Model C

How to Account for Fiscal Sponsorship – Model C

In previous articles we have discussed how to account for fiscal sponsorship agreements under model A and B, (if you would like to read the article – you can do it here for model A and here for model B). Today, I would like to dive into specifics of accounting for fiscal sponsorship agreements under Model C.

Fiscal sponsorship under model C can be described as pre-approved grant relationship or “regranting”. Under this model the project is set up as a separate legal entity from the sponsor and is not considered a program of the sponsor (like it does under model A). In addition to that, the sponsor is not seeking ownership of any part of the results of the work of the project.

How to set up Model C fiscal sponsorship the right way

From the legal perspective, to properly set up and administer fiscal sponsorship under model C can be achieved in 7 steps:

1. The organization (or person) that wants to conduct the project, creates a written grant request to the sponsor, detailing out the specifics of the project to be conducted.
2. The sponsor evaluates the grant request (also called as grant proposal) and makes determination whether the project furthers the charitable mission of the sponsor and carries out the sponsor’s tax-exempt purposes.
3. The sponsor’s board of directors reviews and approves the project as furthering the charitable tax-exempt purposes of the sponsor and signs a board resolution. That board resolution contains documentation of the board’s conclusion and approval of the grant to the project to be funded up to a certain amount or to the extent of the sponsor’s receipt of the outside funds for the project.
4. After that the sponsor and the project sign a written grant agreement that contains the details of all the terms and conditions that apply to the use of funds, as well as relations with the funding sources. Typically, that agreement details out the type of work to be performed by the project and all project performance related specifics.
5. Then solicitation of the funds take place either by the sponsor, the project or a joint effort of the two. The sponsor’s bylaws provide that such solicitations are to be made only under the conditions that sponsor retains complete control and discretion over the funds solicited and received. That element of discretion and control (also known as variance power) should be made known in writing to the funding sources.
6. As the funds come in for the project purposes, the sponsor records revenue restricted for the project’s purposes and then records grant expense as the funds are being disbursed by the sponsor to the project.
7. The last step in this process is monitoring and reporting. The reporting is done by the project providing periodic written expense reports (in accordance with grant agreement) showing its actual expenses and the progress toward achieving grant purposes. It is responsibility of the sponsor to monitor and review reports for propriety and accuracy.

These seven steps help to properly set up and administer fiscal sponsorship under model C. Below is a visual presentation of this model that details out the main processes and documents that need to be in place on both sponsor’s and project’s side.

Tax reporting for fiscal sponsorship organizations – Model C

Under Model C the project has its own legal, tax and accounting identity. The project can be set up as a sole proprietorship, partnership, a business corporation or even a 501 (c) (3). The project could also be a group of people who do not plan to incorporate.

When opening a bank account – the project own federal employer identification number (FEIN) is used. The project can also use a social security number if no FEIN number is available, but it is not advisable to do so – as using one person’s social security number for a group project may be treated as if that person is the owner or the funds for the project. In a situation when no separate corporation was set up it is best practice to apply for FEIN number by filling out a one-page IRS Form SS-4, identifying yourself as an “unincorporated association”.

As the sponsor retains full control over the funds, the revenue is recorded by the sponsor and reported on the sponsor’s tax return (Form 990). The type of tax return filed by the project depends on the legal status of the project. So if the project is a corporation From 1120 is filed with the IRS, if the project is a sole proprietorship then the project income is reported on From 1040 Schedule C and SE.

Accounting for fiscal sponsorship – financial statements presentation

From the accounting perspective in a pre-approved grant the project needs to keep its books and records internally and submit expenditure reports to the grantor along with all supporting documentation to satisfy compliance with the grant agreement. The sponsor must still maintain full discretion and control over the funds received for the project. So, if the project is not adhering to its grant agreement, the sponsor has the right to withdraw the funds from the project and redirect the money to another purpose. On the other hand, if the project is fully adhering to its grant agreement and the sponsor is holding back the funds, the project should be able to enforce the grant agreement as contractual obligation of the sponsor to pay.

Based on this – there is a contradiction from the legal perspective, which I won’t go into very much detail in this article. But from a high level the contradiction is between the federal tax law which emphasizes the discretion of the sponsor (variance power) and state charitable trust law, which emphasizes commitment to donors. In fiscal sponsorship model C nonprofit grant management becomes very important and adhering to the nonprofit restricted revenue recognition is of utmost importance. Hiring a nonprofit CPA or engagement nonprofit CPA services for accounting for fiscal sponsorship and nonprofit bookkeeping can help to be in compliance with the IRS rules and GAAP.

Accounting for fiscal sponsorship under Model C - Journal Entry Examples

In nonprofit accounting for fiscal sponsorship the revenue is recorded as restricted revenue on the statement of activities (income statement). Please note that based on the revenue recognition rules, the revenue is not recognized until earned, so depending on the language of the grant agreement it can be recorded on the statement of financial position as deferred revenue (liability account) and then only recognized on the statement of activities when earned.

Dr.	Cash	$100,000
Cr.	Deferred revenue (liability account)	$100,000

Then, depending on the grant agreement and whether the grant is prepaid or reimbursement-based grant the sponsor records the grant expense.

Dr.	Grant Expense	$100,000
Cr.	Cash	$100,000
Dr.	Deferred revenue (liability account)	$100,000
Cr.	Restricted Revenue	$100,000

If the grant agreement is a reimbursement-based grant, then, once the project incurs the expenses and submits the reimbursement requires, the sponsor records the same entry by debiting Grant Expense and crediting Cash. Nonprofit grant management becomes very important in fiscal sponsorship accounting under Model C.

I wanted to touch on administrative charge in this article as well. Typically, in fiscal sponsorship relationships an administrative charge is established to cover the administrative and general expenses of the sponsor. In general, it is set as a percentage of the revenue or a fixed price. So, let’s assume that in this example administrative charge is 10%, then the sponsor would simply retain a portion of the funds and release restriction at the moment when the revenue is earned by the sponsor and the expenses are incurred by the project.

As such, in the example above the following entries would be made to record the initial receipt of the funds:

Dr.	Cash	$100,000
Cr.	Restricted contribution revenue	$100,000

When the payment is made to the grantor:

Dr.	Grant expense	$90,000
Cr.	Cash	$90,000

And then to reclassify the portion of the revenue for the administrative fee:

Dr.	Restricted Revenue	$10,000
Cr.	Unrestricted revenue – fiscal sponsorship admin fee	$10,000

The most complex part of this is to account for revenue in accordance with grant agreement and generally accepted accounting principles. We have two very good articles that describe the nuances of contribution revenue accounting and accounting for restricted revenue.

Conclusion

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.