If you have created a non-profit organization but are not ready to make full use of it, you should consider the benefits of the tax agency, also known as tax sponsorship. The tax agency allows an organization without internal income status 501 (c) (3) to obtain funds through a non-profit organization established at 501 (c) (3) exempt status. Non-profit organizations have chosen the tax agency for a number of reasons, including uncertainty about the long-term success of their organization, the lack of administrative know-how of their leaders, or the visibility of membership in another non-profit organization. Tax sponsorship describes a relationship between a non-profit organization with a status of 501 (c) (3) and a project led by a separate organization, group or individual that does not have 501 (c) (3) status. Tax sponsorship allows the exempt sponsor to accept, on behalf of the project, limited funds for the sponsored project. The sponsor, in turn, assumes responsibility for ensuring that funds are spent properly to achieve the project`s objectives. This regulation is useful for new not-for-profit companies that want to „test the waters” before deciding whether to form an independent unit or other temporary project or coalition looking for a neutral party to manage funds. It is quite common and entirely acceptable for the tax promoter to calculate administrative costs for its services, which is usually a percentage of the sponsored organization`s budget or program. The use of a tax sponsor meets the requirements of the IRS as long as the tax sponsor retains the right to decide, at his sole discretion, how he will use the contributions. Maintaining control of donated funds is a precondition for the legitimate tax sponsorship agreement.
It is best to outline the responsibilities and obligations of both parties in a written agreement between the tax sponsor and the sponsored organization. An example is published below. The agreement should provide that the tax sponsor is responsible for complying with the legal provisions regarding the receipt, reporting and recognition of donations of public utility. The agreement should also describe the administrative costs that the sponsored organization makes available to its tax sponsor, as well as all the responsibilities that the sponsored organization owes to the tax sponsor. Tax sponsorship is often used by newly created non-profit organizations, which must raise money during the start-up phase before being recognized as exempt by the IRS. The use of tax sponsorship allows a program or organization that is not itself considered tax-exempt to obtain funds for its transactions which – via the tax sponsor – are tax deductible for donors. As a result, tax sponsorship agreements benefit organizations or programs that are not tax-exempt by providing a debit route for income that the organization might not otherwise be able to collect. A non-profit organization can find potential tax agents by looking for other groups with similar missions or groups with whom they are familiar. An online database, the Tax Sponsor Directory, offers free searches for tax sponsors in 33 states and lists eligibility requirements, fees, services and types of supported projects.