Question: We are trying to decide how to structure our grants programs between our direct-giving program and our corporate foundation. Are there any general guidelines to help us?
Answer: Many factors influence how to allocate grantmaking programs between a corporate giving program and a company foundation. Two of the main factors include assessing the potential deductibility of contributions and remaining in compliance with the laws for company foundations. Below is a brief overview of the more common types of grantees and considerations when making grants from a direct-giving program and private company foundation.
Grants to Public Charities and Government Units
Grants to public charities and government units are often the simplest grants to make from either a direct-giving program or a company foundation. Generally, charitable deductions are available for a corporation making grants through a direct-giving program if the contributions are made to organizations classified by the IRS as Section 501(c)(3) public charities or to a government unit if the grant is for public purposes.
Grants from a private company foundation to a public charity or government unit are equally straightforward. However, the Pension Protection Act imposes some new requirements on grants from private foundations to certain types of supporting organizations that makes the due diligence for such grants more involved.
Information on making grants to government units is available at “Grants to Government.” Information on the rules for making grants from a private foundation to supporting organizations is available from the Council’s resources on the Pension Protection Act.
Grants to Private Non-operating Foundations
Grants to section 501(c)(3) private non-operating foundations are simplest if made directly from the corporation. The most common example of such a grant is one from the corporation to its own private non-operating foundation. These grants are eligible for a charitable contribution deduction.
Grants from a private company foundation to another private, non-operating foundation are possible, but strict rules must be followed. To avoid excise taxes, the granting private foundation must follow a specific process called expenditure responsibility. This process—which includes conducting a pre-grant inquiry, a written grant agreement, periodic reporting from the grantee, and reporting on Form 990-PF—is designed to demonstrate that the granting private foundation has appropriate oversight over the grant. Further, for the grant to count toward the private foundation’s payout requirements, the granting private foundation must follow another set of rules (the “out of corpus rules.”) For these reasons, private foundations do not frequently make grants to other private, non-operating foundations.
A direct-giving program or a private company foundation may also make grants to private operating foundations. The rules for such grants are discussed in Understanding Private Operating Foundations.
Grants to Non-charities
Non-charities include any organization not classified as a Section 501(c)(3) charity. A chamber of commerce or a newly formed organization that has not received recognition from the IRS as a charity are both examples of non-charities.
Generally, grants from a direct-giving program to non-charities will not be eligible for a charitable deduction. The few exceptions are grants for charitable purposes to Section 501(c)(8) fraternal societies, orders or associations, Section 501(c)(13) cemetery companies, and 501(c)(19) veterans’ organizations. Because grants to the majority of non-charities are not eligible for a charitable deduction, many corporate grantmakers choose to make such grants through the company’s private foundation.
Grants from a private foundation to a non-charity are possible as long as the private foundation follows the expenditure responsibility rules described above. Read an overview of the rules for grants to non-charities and new charities.
Grant to Individuals
Grants to individuals include grants for scholarships, awards, disaster relief, and emergency hardship. While grants to individuals could be administered through a corporate giving program, such grants would not receive a charitable deduction.
Grants from private company foundations to individuals are permissible. The rules for such programs vary depending on the purposes of the grant and the charitable class being served. For example, grants for scholarships for company employees or their dependents are permissible, but strict guidance from the IRS must be followed to ensure that the grant program is a charitable program.
Read more about establishing a program to provide scholarship for employees’ children and disaster relief. Other information about grants to individuals programs can be found in Grants to Individuals by Private Foundations.
Grants to Non-U.S. Organizations
Grants to non-U.S. organizations are not eligible for a U.S. income charitable tax deduction. While there may be cases where a grant by a corporation’s foreign subsidiary may be deductible under the foreign country’s tax laws, these rules will vary.
Grants to non-U.S. organizations from private foundations are permissible if funders follow the expenditure responsibility rules or make a determination that the grantee is the equivalent of a U.S. charity. Read more in Equivalency or Expenditure Responsibility? A Guide in Plain English.
Resources on other issues that arise frequently in the context of international grantmaking, such as complying with counter-terrorism measures, are available at www.usig.org.
Grants That Result in Tangible Benefits
Generally, grants that result in tangible benefits—such as tickets to an event or advertising for the company—should be made directly by the corporation. The grants are permissible; however, the charitable deduction available to the company for the grant will typically be reduced by the fair-market value of the benefits received.
Making such grants from a company foundation raises concerns about self-dealing. For example, if a grant from the company foundation resulted in advertising opportunities for the corporation, the use of such advertising by the company would be a prohibited self-dealing transaction. Similarly, if a grant from a company foundation results in tickets to a charity’s benefit, the foundation would have to carefully consider who could use such tickets without violating the self-dealing rules. For these reasons, it is often better to avoid these issues by making such grants through the corporation directly.
Further discussion of these issues is available in Company Foundations and the Self-Dealing Rules and That’s the Ticket.