Question: May our corporate foundation or corporate giving program provide a grant to an organization that is not a charity?
Answer: Yes, but the process required to make a grant to a non-charity depends on the type of corporate giving vehicle used to make the grant. Private foundations must take steps to ensure that the grant is not subject to penalty taxes. Corporate giving programs may not take an income tax deduction for grants to non-charities.
Company giving programs and company foundations are sometimes asked to support charitable activities of non-charities. For example, a corporate grantmaker may be asked to support an after-school tutoring program organized by a Chamber of Commerce or a local volunteer fire department that is not recognized as a unit of government or a section 501(c)(3) public charity. The rules for such grants vary depending upon what type of corporate giving vehicle is being used.
Private foundations. If a private foundation makes a grant to an organization that is not a section 501(c)(3) public charity, it must follow a procedure to ensure the grant is not a taxable expenditure for the foundation. This procedure, outlined in IRS regulations, is called "expenditure responsibility." Expenditure responsibility is designed to ensure that a grant is used for charitable purpose and that the private foundation maintains appropriate oversight and documentation of the grant.
Expenditure responsibility consists of five steps:
1. Conducting a pre-grant inquiry including a reasonable investigation of the grantee to ensure that the proposed activity is charitable and that the grantee is able to perform the proposed activity.
2. Executing a written agreement with the grantee that specifies the charitable purposes of the grant and includes provisions that prohibit use of the funds for lobbying activities and require the grantee to return any funds not used for the designated purposes.
3. Requiring the grantee to maintain the grant funds in a separate fund so that charitable funds are segregated from non-charitable funds.
4. Requiring the grantee to provide regular reports on the use of the funds and the charitable activity support by the grant.
5. Including a report on Form 990-PF about the grant including a brief description of the grant, the amount, the charitable purpose and the current status of the grant.
While these steps must be followed, foundations frequently find that exercising expenditure responsibility is less onerous than it may seem at first glance. More details about the expenditure responsibility process and sample forms can be found in Expenditure Responsibility Step by Step by John Edie.
Failure to exercise expenditure responsibility when making a grant to a non-charity could result in taxes on the foundation and any foundation manager who knowingly approved the transaction.
Public Charities. Corporate foundations organized as public charities have more flexibility in funding charitable activities of non-charities. While there are no required steps under IRS regulations, the public charity must ensure that the funds are used for charitable purposes. For this reason, it is often prudent for public charities to follow the private foundation expenditure responsibility rules with the exception of the report on the Form 990. Following these steps helps ensure clear documentation of the process the charity used to provide a grant to a non-charity and continued oversight over the grant.
Corporate Giving Programs. Grants may be made to non-charities directly through a corporate giving program without the level of oversight necessary for grants made from a private foundation or public charity. However, such grants are not eligible for charitable deductions because the grant recipients are not section 501(c)(3) organizations.
John A. Edie, Expenditure Responsibility Step by Step (Council on Foundations, 3rd ed. 2005).