Many private foundations, in an effort to simplify their grantmaking processes, state they only give grants to 501(c)(3) organizations. Unfortunately, not all 501(c)(3) organizations are the same, and not all of them have simple grantmaking requirements. In fact, supporting organizations and private foundations, both of which are 501(c)(3)s, generate additional requirements that must be fulfilled or penalty taxes will be incurred. And, while not as common, it should be understood that private foundations can make grants for charitable purposes to individuals and organizations that are not 501(c)(3)s, but they must follow specific guidelines to do so.
As a grantmaker, it is important that you know how to make distinctions between different types of nonprofits so that you can fulfill the necessary requirements.
A charitable organization that is recognized as tax-exempt by the IRS. Private foundations and public charities are two main types of 501(c)(3) organizations. Public charities are then divided into three distinct categories. As a grantmaker, it is critical to know which specific category the potential grantee falls into; knowing a grantee is a 501(c)(3) is simply not enough.
- 509(a)(1). One type of 501(c)(3) public charity. IRS determination letters may use the code 170(b)(1)(A) rather than 509(a)(1), but the categories are equivalent. This group includes churches, hospitals, schools/universities, governmental units, and other organizations that are supported through donations from the general public—all referred to as “publicly supported” charities.
- 509(a)(2). Another type of 501(c)(3) public charity. An organization in this group receives a minimum percentage of its income in the form of revenue earned through activities related to its charitable mission. This type is commonly known as a “fees supported” or “gross receipts” organization.
- 509(a)(3). A third type of 501(c)(3) public charity. An organization in this group has only one or a few sources of income (like a private foundation) and makes grants to support one or more preselected 509(a)(1) or 509(a)(2) public charities. This type is commonly known as a “supporting organization” and has three main subtypes, depending on how its governance is structured. Treasury regulations now require expenditure responsibility for grants to certain supporting organizations and exclude them from the 5% payout calculation. As a result, it is important to understand all funding restrictions which are outlined in the tear sheet “Supporting Organizations.”
- A charitable organization with a 501(c)(3) designation that does not receive the additional IRS designation of public charity due to the fact that it has little or no public funding or influence. As a result, grants to private foundations have additional requirements.