Originally published in the Wisconsin Philanthropy Network’s blog.
For many reasons, a private foundation may choose to make a grant to an organization other than a public charity. For instance, the private foundation may want to make a grant to another private foundation (perhaps the recipient foundation is operating a charitable activity and the private foundation wants to contribute to the activity). Or, the private foundation may want to make a grant to an organization like a section 501(c)(4) social welfare organization or (c)(6) business league that is carrying on a charitable purpose directly.
Can a private foundation make a grant to an organization other than a public charity? Yes, it can. Technically, grants to entities other than public charities are “taxable expenditures” and are subject to a dreaded excise tax. However, a private foundation can make a grant to any organization (including section 501(c)(6) organizations) for bona fide section 501(c)(3) charitable purposes, so long as it engages in “expenditure responsibility.”
Expenditure responsibility requires:
1. The granting private foundation must make an inquiry about the potential grant and grantee. The private foundation should have some level of diligence that the recipient will follow-through and use the grant for the proposed purpose.
2. The private foundation must make the grant pursuant to a written grant agreement under which the grantee must agree to use the grant only for charitable purposes and reporting requirements (for example, the grantee agrees not to use the funds for lobbying, propaganda or political purposes). The recipient must agree to account for all of the expenditures from the grant.
3. The grantee must deliver annual reports to the granting private foundation and a final report with respect to all expenditures made from such funds. These reports continue until the grant funds have been expended.
4. The private foundation must report certain and specific information on its IRS Form 990PF regarding the grant.
5. The private foundation must maintain certain records regarding the grant.
Although somewhat cumbersome, many private foundations use the “expenditure responsibility” process regularly, and even incorporate the reporting requirements into their grant agreements with public charities. Skilled accountants in this area have templates with which to file the expenditure responsibility reports efficiently.
Currently, it takes a new organization about six to nine months to receive a determination letter. Private foundations may want to make grants to these organizations, but may be “spooked” by the fact that the determination letter has not arrived (and there is some possibility that the IRS may not grant the exemption). Private foundations can protect themselves by engaging in expenditure responsibility to avoid any risk that the grant will be a taxable expenditure if the organization does not qualify as a public charity.