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The Ups and Downs of Using a Fiscal Agent to Apply for Grants

July 5th, 2010 · by Isaac Seliger · 7 Comments

We sometimes write proposals, usually for foundation grants, when the applicant is not tax exempt under Section 501(c)(3) of the Internal Revenue Code (IRC). Most government grant programs and almost all foundations require that the applicant be a public benefit, tax exempt organization, but one can also use a fiscal agent/fiscal sponsor. A fiscal agent can enable an individual (e.g., artist, researcher, inventor, explorer looking for the The Lost City of Z,* etc.) or unincorporated associations (e.g., Citizens for a Better Owatonna, Residents United Against Everything, etc.) to be considered for grants. The ineligible individual or entity has to make a deal with the 501(c)(3) organization to, in effect, borrow their tax exempt status and be responsible for the grant funds received.

The upside of using a fiscal agent is that the project proponent can try to get their snout into the funding trough without going through the time consuming process of forming a corporation (e.g. finding folks willing on the board of directors, obtaining a nonprofit charter in their state, etc.) and applying for and getting a Letter of Determination of Tax Exempt Status from the IRS. While it is possible to form a new nonprofit and obtain a Letter of Determination by yourself (I first did it when I was about 21), most people use a attorney and/or accountant to do the paperwork and must pay application fees at significant expense while waiting from six to nine months for the paperwork to wind its way through the state and federal bureaucracies.

This makes using a fiscal agent attractive, particularly if the project proponent wants funding for something urgent, like, say, cleaning oil-soaked birds in the Gulf today, providing post-Hurricane Katrina disaster relief in 2005 or offering case management for those newly diagnosed HIV in 1985. It is also a good approach for artists and other individuals who want to concentrate their creative energies on outcomes, not process.

The advantages to the grant user are obvious, but what’s in it for the fiscal agent? Some established organizations genuinely are interested in expanding availability of services in their community and want to lend a hand to emerging nonprofits. Others, a cynic like myself might conclude, are looking to collect administrative fees and influence the direction of service delivery in their bailiwick. But, whatever the motivations on both sides, fiscal agency remains popular.

As a result, we occasionally accept selected grant writing assignments involving fiscal agents, but only after we explain the potential pitfalls and challenges, such as:

  • The plausibility of the fiscal agent/grant user relationship, which increases if the fiscal agent conducts activities at least vaguely similar to the grant user. It is hard, for example, to explain why a domestic violence prevention organization is serving as the fiscal agent for a documentary on the American Revolution. It is important to not give the impression to the funder that the 501(c)(3) fiscal agent is “renting” its tax exempt status.
  • It is not good if the 501(c)(3) fiscal agent appears to be a shell organization to serve only as a pass-through to the ineligible grant user. For example, for-profit medical groups sometimes set up a “captive” 501(c)(3) affiliate. While the captive may be an eligible applicant, if it has no track record and grant funds will be used to hire the medical group, or some of its docs, the relationship may be seen as a sham. There are many situations, however, in which this affiliated nonprofit relationship is perfectly innocent and accepted, such as when a school district establishes a 501(c)(3) “educational foundation” to raise money through donations or grants to supplement tax revenues. Since many foundations will not fund entities like school districts, which are taxing entities, the affiliated nonprofit structure has become quite common and accepted.
  • Even if the intentions of both parties in the fiscal agent relationship are believable, the real problem often emerges when the grant seeking effort is successful. It’s fine to contemplate the nuances of fiscal agent responsibilities in the proposal world, but the real world complicates things. To paraphrase Grandmaster Flash in one of the first rap anthems, White Lines, “The money gets divided / The fiscal agents get excited.” When grant funds start flowing, the fiscal agent will often suddenly develop a need and deep interest in what the grant user is doing. In extreme cases, the fiscal agent may simply deep-six their “partner” to run the program themselves and there will be little, if anything, the grant user can do about it.

If your idea is good enough to be grant-worthy, it is probably worth your time and money to establish a new nonprofit and obtain tax exempt status instead of using a fiscal agent. Unless there is urgency to the problem being addressed, it is best to form the new nonprofit at the start. Otherwise, you are telling the funder that you are hedging your bets by not investing in the new organization until the grants are approved, implying that you want the funder to take a risk while you are unwilling to do so.

* An explorer seeking grants for an expedition to find the Lost City of Z actually contacted us about 12 years ago. I explained that he needed a fiscal agent, but he never called back. Either he couldn’t find a fiscal agent or, like John Voight in one of my favorite “big animal” movies, Anaconda, was swallowed by a large snake on his way through the Amazon to Z.

We were also hired by a fellow seeking grants through a fiscal agent to set up a reserve for Komodo Dragons. We lost contact with our client after he left for Komodo Island in Indonesia, where he may have been eaten by a dragon. His fate is unknown, but I will leave the rest of this tale for another post.

Tags: Advice · Budgets · Grants · How-to · Technical

7 responses so far ↓

  • 1 Intelife // Jul 7, 2010 at 7:52 am

    Another point that I think is worth making is this.. Today, if your group doesn’s have three years worth of financials behind them plus a well balanced portfolio, plus a good mix of donations, other grant funding streams etc. etc. in order to show fiscal solvency, don’t even bother to apply to most foundations or government for ANY grant funds. A newly established non-profit, in reality, will never be able to compete with established non profits, even if it is a niche group. That is one more reason that fiscal sponsorships should be encouraged…

  • 2 Jake Seliger // Jul 7, 2010 at 12:50 pm

    This comment is mostly wrong; see our post “When It Comes To Applying for Grants, Size Doesn’t Matter (Usually)” for greater detail about why it’s wrong. New applicants are sometimes favored, sometimes not, depending on the program; most often, you won’t know which.

    A newly established non-profit, in reality, will never be able to compete with established non profits, even if it is a niche group. That is one more reason that fiscal sponsorships should be encouraged…

    We’ve written numerous funded proposals for new or relatively new agencies.

  • 3 Dee Frewert // Apr 27, 2011 at 8:14 am

    Understanding and stating the relationship between the organizations is important to set expectations through the course of the grant award. Aside from reputation considerations and execution of the intents for which the grant is provided, there is a great deal of overhead administration for the fiscal agent- reporting (internal and external), reconciling budgets/payment, and reporting to the IRS should the organization NOT follow through with their intent to become a 501c3. The FA or Fiscal Sponsorship arrangement should add these costs into the arrangement.

  • 4 REV. SANDRA // Aug 25, 2011 at 6:19 pm

    How does an organization charge for its FA services? What percent should be paid to the contracted accountant?

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