Anyone considering or currently participating in fiscal sponsorship who wants to understand how funds are held and what oversight a fiscal sponsor retains over project funds.
What is variance power?
Variance power is what allows a fiscal sponsor to hold restricted project funds as its own charitable assets for tax and accounting purposes. (For background on the models, see Fiscal Sponsorship Models.)
When donors give in support of a fiscally sponsored project, those funds legally belong to the fiscal sponsor and are held as project funds restricted to the project's charitable purpose. Charities, including fiscal sponsors, have a duty to ensure any funds they hold are used for the intended charitable purposes. Variance power is the "discretion and control" the IRS expects a sponsor to retain to fulfill this duty, and it is what keeps the relationship legally sound.
What it means in practice
Variance power gives the fiscal sponsor two rights over project funds.
Withhold, withdraw, or demand return. If a project materially breaches its agreement with the sponsor or becomes unable to carry out its mission, the sponsor may withhold disbursements, withdraw funds, or require their return. Triggers include misuse of funds, engaging in prohibited political campaign activity, exceeding lobbying limits without notifying the sponsor, unauthorized use of the sponsor's name or tax-exempt status, or a project becoming non-operational with no viable path forward.
Redirect. If a project's purpose becomes unnecessary, impossible to fulfill, or inconsistent with the sponsor's charitable mission, the sponsor may redirect remaining funds to another charitable purpose. Triggers include a project closing with no successor and funds that cannot be returned to donors per donor intent, a project's mission becoming legally impermissible, or mission drift that takes the project outside the sponsor's charitable purposes. Redirect most commonly arises at the end of life, when donor restrictions and successor options need to be worked through together.
What it does not mean
Variance power is not a mechanism for the fiscal sponsor to control day-to-day operations or override a project's strategic decisions. A sponsor typically delegates management authority to the project's leadership and expects projects to operate independently within the terms of the sponsorship agreement. These rights exist to protect the legal integrity of the fiscal sponsorship structure for donors, the sponsor, and the projects themselves.
Sources and further reading
- Gregory L. Colvin & Stephanie L. Petit, Fiscal Sponsorship: 6 Ways to Do It Right (Study Center Press, 3rd ed.), the foundational text defining Model A and variance power.
- National Network of Fiscal Sponsors, Guidelines for Comprehensive Fiscal Sponsorship.
- IRS Revenue Ruling 68-489, the "discretion and control" standard that allows a charity to direct funds while preserving deductibility.