A Nonprofit Primer for Producers

By Maida Lynn

Most producers I know have at least one toe – and many are knee-deep! – in nonprofit waters. Perhaps you’ve gotten a grant from Perspective Fund or from someone’s Donor Advised Fund at Schwab, or your aunt Sally took a tax deduction for putting $25,000 towards your next film. But how many of you feel you have a confident understanding of what is essentially IRS tax code in practice? I wouldn’t blame you if you don’t; it can be pretty dense and dry stuff.

What follows is my attempt to demystify the components of the nonprofit universe that most directly relate to indie filmmaking in the hope that it empowers you to ask good questions and make the most informed decisions possible as you fundraise for your projects.

But first, a disclaimer: I am not a CPA, attorney, or foundation staff member. I’ve functioned as an independent, grants-focused funder of documentary films and the broader ecosystem for about 12 years now. What I share here is based on my personal experience, research I’ve conducted, and conversations with my accountant and lawyer. It’s intended for informational purposes only.

Now that’s out of the way, let’s start with the basics:

What’s a “501c3”?

“501” refers to the section of the IRS code that establishes the rules for tax-exempt organizations. Qualifying entities are not required to pay federal income tax and, often, state income, sales, and property taxes either (rules vary state-by-state). “c” refers to the section that lists the exempt organization types (there are 29! You can read the text of the statute for yourself if you really want to nerd out), and “3” is where you find “(c)orporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes…” (emphasis added).

This is also the paragraph that states that in return for the tax exemption, “no part of the net earnings… inures to the benefit of any private shareholder or individual.” In other words: yes, there can be income, but there cannot be excessive profit-taking and proceeds must be responsibly returned to the organization and its charitable purpose.

What is a fiscal sponsor and how does it operate?

Because films are not in and of themselves non-profits, many producers set up their projects with fiscal sponsorship in order to receive charitable donations. In very simple terms, a fiscal sponsor is a 501c3 that is approved to accept donations on behalf of projects (yes, like films!). It’s a way to accept charitable donations without having to go through the rigamarole of becoming a non-profit yourself. “Rigamarole” being the technical term for obligations such as establishing a board of directors (and having meetings), crafting and filing articles of importation, paying fees, and adhering to IRS regulations in perpetuity to maintain non-profit status.

The fiscal sponsor organization assumes all of the obligations and risks, guaranteeing that these funds meet the IRS charitable guidelines. They also often offer some level of bookkeeping and accounting services, and, in exchange, charge a 5-10% fee on the contributions they manage on the project’s behalf. Note: it’s important to research your potential fiscal sponsor’s background and review their 990 (search ‘ProPublica + organization name’) to make sure they are on steady financial ground.

Once you’ve set up fiscal sponsorship, you can then accept tax-exempt donations from individuals, foundations, and DAFs (Donor Advised Funds). Individuals who make a direct donation to a 501c3 get a receipt and can itemize it on that year’s tax return if they so choose. Grants made from a foundation or DAF, however, come from a pool of money that has already received the charitable tax deduction before it’s been distributed to any public charity.

Say, what? Yes. Foundations and DAFs are essentially non-profit parking lots where people “donate” their own assets, thereby taking the charitable deduction when it best suits their overall financial plan – not when the funds make their way to an outside charity. This is what is often referred to as an endowment, and these funds can be invested just like other assets can, as long as the income earned on those investments is put to charitable purpose.*

Once the money is in the foundation or the DAF, it’s theoretically public: remember, these entities are tax-exempt because they are “operated exclusively for charitable purposes.” How does the government ensure that funds don’t sit in foundation and DAF accounts forever? In the case of foundations, you may have heard of the “5% rule,” which states that each year a private foundation must distribute at least 5% of the average fair market value of its investment assets for that year to charitable organizations. They are of course welcome to pay out more, but many choose not to. You wouldn’t be alone if you’re wondering if a 5% payout requirement is enough, but that’s a hotly debated topic and well beyond the scope of this piece.

Back Up: What, exactly, is a DAF?

Think of a donor-advised fund as a “charitable account” that sits under the umbrella of a large entity, like a finance firm (Schwab, Fidelity and the like) or a community foundation (Silicon Valley Community Foundation, for example). Instead of standing up a foundation of their own, which requires a board of directors, annual meetings, filing tax returns, and other administrative responsibilities, people move assets into the DAF and take the charitable deduction at that time. The term “donor-advised” refers to the fact that these funds are now technically held by the large institution, who bears the responsibility of ensuring they are ultimately distributed to 501(c)(3)s in good standing, with the original donor acting as an advisor over the distribution of those funds.

If a person wants to support your film project with a grant from their DAF, they make a recommendation (ie, they “advise”) their DAF-holder that they want to make that grant; once the DAF-holder checks the legal standing of the recipient, they release the funds. Without getting too much in the weeds here about contracts and agreements, it’s important to state that it is illegal for a donor to fulfill a binding grant promise with a donation from a DAF. In other words, I can’t sign a contract that says, “I, Maida Lynn, will donate $50,000 to Film XYZ by ABC future date out of my DAF at Schwab,” because it’s Schwab that’s on the hook for the donation, not Maida Lynn. If Maida Lynn depletes the DAF prior to ABC date, Schwab is then liable for making a donation they never agreed to. A situation they, understandably, prefer to avoid. What I can sign, however, is a contract that says something like, “(g)rantor intends to recommend a grant from the Maida Lynn Charitable Fund, a donor advised fund, in the amount of $50,000. Grant recommendations are subject to the approval of Schwab Charitable. This expression of intent does not create a legally enforceable obligation.”

Unlike foundations, DAFs have no annual minimum payout requirement. There’s also a marked lack of transparency; foundations, for example, are required to file 990s – DAFs are not. Here’s a fun exercise: head over to the Media Impact Funders Media Grants Data Map and look at the top film funders since 2009. You’ll see some familiar names, but #7 is the Silicon Valley Community Foundation, with 843 grants totaling $56 million. This might lead you to think they have a film granting program you can apply to, but you’d be wrong. These are all payouts from DAF accounts held there, with no way to see who’s behind the money.

Last thing here about foundations and DAFs: the IRS prohibits “self-dealing,” which in plain English is a way to prevent donors from using their charitable funds for direct personal benefit. There’s a ton of gray area here and, frankly, abuse (family foundation “strategic retreat” in Aruba, anyone?) but my CPA and attorney have advised me to pay out of pocket for anything that has monetary value (like a table at a gala, a membership, or film festival tickets). Executive Producer credits, which many donors receive as acknowledgement for their film support, are very hard to put a true market value on, so it’s unlikely to ring any IRS alarm bells. My advice is to check in with your attorney and CPA to devise a framework and contract language they are comfortable with.

I would be remiss if I didn’t at least briefly mention one other key actor in the nonprofit film sector: intermediaries. These are the organizations many of you interface with directly: Sundance, Firelight Media, Chicken & Egg, The Gotham – just to name a few. They are themselves 501c3s (and, in some cases, fiscal sponsors) who rely on donations to meet their annual expenses. In addition to running programs like labs, markets and festivals, many of them also re-grant to film projects.

This is as good a point as any to wrap up our producer nonprofit primer. I hope it’s provided more clarity than not; however, I am interested in what questions remain on this topic. Feel free to send them to hello@dearproducer.com and perhaps I can answer them in a future write-up. Happy fundraising!

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*This income is taxed, at 1.4%. It’s the “excise tax” you may have heard about recently, which a version of the Big, Beautiful Bill threatened to raise up to 8%, mostly to stick it to university endowments, like Harvard’s. The philanthropy sector got very organized and successfully excised it from the legislation so the rate remains 1.4% – for now.