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COLUMN-How small charity projects can sidestep complex tax rules
September 13, 2012 / 4:11 PM / 5 years ago

COLUMN-How small charity projects can sidestep complex tax rules

By Amy Feldman

NEW YORK, Sept 13 (Reuters) - Even if you have a brilliant idea for a new charity, your altruistic intentions could get derailed by a morass of complicated 501(c)3 tax rules and regulations.

There is an alternative, however. Consider piggybacking onto an existing organization's infrastructure and tax status, a process known as fiscal sponsorship. This allows you do good work, without the tax hassle of running your own organization.

That's how Ken Standley, an investment analyst, and his wife Natalie Zelt, got their charitable project off the ground.

They wanted to gift emerging photographers' images to the Museum of Fine Arts in Houston, where Zelt works, raising cash at an annual party to do so. But they knew their charitable project, called Gift of Gift of, would be too small to set up as an official 501(c)3 not-for-profit organization.

Enter Fractured Atlas - a not-for-profit that does fiscal sponsorship for arts organizations.

"Fiscal sponsorship provides the opportunity for people to make a tax-deductible donation to our organization, while moving the back-office stuff involved in doing that," says Standley.

Fiscal sponsorship allows an existing 501(c)3 not-for-profit to sponsor smaller philanthropic projects. It lets them take advantage of the not-for-profit tax status (so that projects can receive tax-deductible charitable donations) and also handles many of the tax, regulatory, and bookkeeping requirements.

The process has been available since the 1950s, but it's gained momentum in recent years, say people involved in the industry, in part because the costs of complying with the tax and philanthropic regulations have soared. Also, the number of charitable organizations has grown exponentially, from around 150,000 in the 1950s to well over 1 million today.

A group that already has 501(c)3 tax status "can create an economy of scale by bringing others under the umbrella or in-house," says Greg Colvin, a principal at tax firm Adler & Colvin in San Francisco and author of a book on fiscal sponsorship.

WHAT TO KNOW

First, to qualify for fiscal sponsorship your project must really be non-profit.

That doesn't mean everything you do must be not-for-profit. For example, a documentary filmmaker could be doing both for-profit and not-for-profit work, but there must be a division between the non-profit projects that can qualify for fiscal sponsorship, and the projects for profit that do not.

Second, understand that you will cede a certain amount of control over funds and administration. Fees for fiscal sponsorship typically range from 6 percent to 10 percent of revenues, which sounds like a lot but is generally far less than what it would cost for a small organization to bring all the financial oversight in-house.

Still, there are dangers.

"Most of the groups that do fiscal sponsorship, and most of the groups under it, have no idea of the risks," says Jonathan Spack, executive director at Third Sector New England, who has been in the field since 1979 and whose group currently sponsors around 40 projects.

Among the risks are that the fiscal sponsor's accounting system cannot handle the job or that it doesn't have the right people on staff to comply with all the federal and state regulations.

Also, your program must fit within the mission of the organization sponsoring you. Some fiscal sponsors focus on different areas - such as Fractured Atlas on arts or the Earth Island Institute on environmental projects - while others limit themselves by geography.

To find a fiscal sponsor, one place to start is a directory of fiscal sponsors at www.fiscalsponsordirectory.org.

To check up on your fiscal sponsor, you can start at GuideStar (www.guidestar.com), which compiles information on the nation's non-profits, and check out its mission statement and financials.

Another way is to see if its operations follow the guidelines for best practices, published by the National Network of Fiscal Sponsors. ()

WHEN TO MOVE ON

While some projects choose to remain under the umbrella of fiscal sponsorship for many years, others hope to set up their own legal entity once they reach a certain size. And still others will move from one fiscal sponsor to another as they grow.

"People didn't used to shop around, but now there is more choice," says Brad Luckhardt, director of business development at Tides, a large San Francisco-based fiscal sponsor. "It's important to see what's out there, and to know what's the right fit for you."

Richard Miller, co-founder of UpBeat NYC, a music program for disadvantaged kids modeled on a program named El Sistema in Venezuela, is already on his second fiscal sponsor, and in June applied for 501(c)3 status.

The project started in 2009 in the Bedford-Stuyvesant neighborhood of Brooklyn as a part-time project, and has since expanded to a full-time gig for Miller, a $50,000 budget and a focus on children in the South Bronx. When he started, he looked into 501(c) status, but says, "It was just way beyond any of our knowledge to do that."

The first year, Upbeat NYC was sponsored by the BedStuy Campaign Against Hunger - the first time that organization had sponsored another project - and after a year, it moved to Fractured Atlas.

"The most eye-opening thing is how much management is involved in even a very small organization," Miller says. "And once you get the 501(c)3 status, you have to be in compliance with that, and the financial statements and reporting are pretty involved. So you have to prepare for that, and you need to get sound financial systems in place."

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