By Ruth Masterson, Exponent Philanthropy
Your foundation can be extremely imaginative while still keeping its grantmaking straightforward. Or it can take full advantage of the tax code’s flexibility to make grants that are more complicated—and still perfectly legal. Our goal is neither to encourage you to stay simple or to get complicated with your giving, but to help you be aware of all the strategies at your disposal.
In fact, private foundations can make grants to almost anyone or any organization, including other private foundations and tax-exempt organizations, such as 501(c)(4)s, 501(c)(5)s, and 501(c)(6)s. Private foundations also can make grants to foreign organizations, individuals, unincorporated groups, and for-profit entities. You must just follow two steps: the grant must be for a charitable activity or project, and you must follow appropriate procedures as determined by the IRS.
Do speak with an attorney before taking on any of the “somewhat complicated” or “complicated” grants below, because there are nuances that are beyond the scope of this article.
Very Simple Creative Grants
The simplest grants are those made to organizations recognized by the IRS as public charities under Section 501(c)(3) of the tax code. This includes foreign organizations that have a determination letter from the IRS. To make these grants and apply them toward a foundation’s annual minimum payout, the funder must only confirm the organization’s exempt status.
Just because these are the simplest grants to make doesn’t mean they aren’t creative. Consider general operating grants, capacity building grants, funding a social enterprise, establishing an innovation grant fund, or providing disaster relief.
Somewhat Simple Creative Grants
If you lean toward simple but are willing to take on a little more work, you could make grants to charities that require more digging to determine their tax status. Several permissible grantees are unlikely to be in possession of an IRS determination letter:
- Organizations that are part of a group exemption—some religious, others organized with chapters
- Tiny charities, typically with annual gross receipts under $5,000/year, which may qualify as tax-exempt without ever applying to the IRS
- Government agencies, school districts, and public libraries, all which take effort to determine if truly a government entity
Somewhat Complicated Creative Grants
At a level we’ll deem “somewhat complicated” are grants to new charities whose applications are still pending, to non-charities, to other private foundations, and to certain supporting organizations. For all these, you’ll need to perform a process known as expenditure responsibility. In some cases, you need to do a bit more.
Expenditure responsibility isn’t hard to do, but it does require the following five steps:
- A substantive and genuine pre-grant inquiry
- A written grant agreement with some specific language in it
- The recipient to segregate funds from others it receives
- A written grant report to the funder
- A separate list of expenditure responsibility grants on the grantor’s Form 990-PF
Grants to new charities with pending determination letters and grants to non-charities require only expenditure responsibility. Grants from a private foundation to a private nonoperating foundation require the grantee to spend out the grant amount within the following year, and, to count the grant toward its minimum payout, the grant must be itemized in each foundation’s Form 990-PF.
If the grantee is a supporting organization—a subset of 501(c)(3) organizations classified as 509(a)(3) public charities—you have to pay close attention to the type of supporting organization. You can make grants without expenditure responsibility to Type I, Type II, and some types of Type III supporting organizations, with restrictions on the foundation’s control. The IRS recently issued final regulations on the other type of Type III; see your attorney before making a grant to a Type III supporting organization.
Complicated Creative Grants
Advanced but manageable strategies include direct international grantmaking; grants to individuals for scholarships, individual disaster relief, emergency hardship, or similar uses; and funding advocacy.
Here are some examples:
- Direct international grantmaking can be done using expenditure responsibility or equivalency determination. Resources abound and the process is straightforward, even with new rules in response to concerns about terrorism.
- Foundations can make grants to individuals for scholarships and similar uses, but the foundation must follow an IRS-approved procedure; approval can be obtained by filing Form 8940. On the other hand, grants to individuals for disaster relief, relief of poverty, or similar uses do not require IRS pre-approval.
- Many foundations are aware of prohibitions against lobbying (except in self-defense), but too often that rule is applied to organizations they fund. Unless making an expenditure responsibility grant, a foundation can fund an organization or project that does advocacy as part of its work; it need not prohibit advocacy work, but it must refrain from covering any advocacy portions of the budget. This could be accomplished through a general operating grant.
All in all, whereas giving to traditional 501(c)(3) public charities is a legal way to go—and often a great way to accomplish your work—don’t be limited to those in your thinking. Be creative!
Thanks to Andrew Schulz, Esq., for his help creating the conference session on which this article is based and to Ingrid Mittermaier, Esq., for her comments.
Want to learn more? There’s still time to register for Exponent Philanthropy’s 2016 National Conference, September 26-28 in Chicago, including sessions on this topic and other tax & legal matters.
Senior Program Director Ruth Masterson works closely with members to create written materials and training curricula, and answers member questions on foundation administration, governance, boards, and tax and legal topics. Prior to joining Exponent Philanthropy, Ruth served nonprofits in her work at Adler & Colvin, the Council on Foundations, Build Community Arts Center, and San Francisco BayKeeper.