Taxable expenditures are grants or expenditures made by a private foundation that are either: (1) prohibited, or (2) in IRS-specified areas without following the strict IRS rules. Below are brief descriptions of those that are completely prohibited followed by those that have additional requirements to avoid being taxable expenditures.
The following expenditures are prohibited:
- Influencing public elections: Not only is the foundation likely to face significant penalties for participating in an election, but this activity may be grounds for revocation of the foundation’s tax-exempt status.
- Non-charitable activities: A grant or questionable administrative expenditure for non-charitable purposes by a private foundation may subject the organization to penalties.
- Lobbying: This refers to any activity made in an effort to influence legislation. Foundations may try to influence public policy, but by means other than lobbying legislation.
The following expenditures are allowed, but you must comply with specific IRS rules:
- Grants to individuals: Your foundation must receive prior approval from the IRS to give grants to individuals for travel, study, or similar purposes. Grants to individuals for other purposes such as disaster relief do not need IRS approval, but legal counsel should be sought to ensure the purposes are charitable and appropriate record-keeping is done.
- Grants to non-U.S. organizations: Foundations may give to foreign organizations, but they must either have an equivalency determination that verifies the organization is equivalent to a U.S. public charity, or the foundation must follow extra procedures called “expenditure responsibility.”
- Grants to certain supporting organizations (509(a)(3) public charities): Foundations must exercise expenditure responsibility when making grants to Type I, II, or III supporting organizations if any foundation insiders or “disqualified persons” directly or indirectly control either the supporting organization or its supported organization. Foundations must do the same with “non-functionally integrated” Type III supporting organizations. In addition, these grants will not, under any circumstances, count toward the foundation’s 5% distribution requirement. Grants to supporting organizations in all other circumstances can be treated as grants to any other 509(a)(1) or (2) public charity.
- Grants to U.S. organizations that are not public charities: Your foundation may give to an organization that is not a public charity (i.e. Rotary Club, chamber of commerce) if the grant is for charitable purposes, but you must follow extra procedures called “expenditure responsibility.”
- Grants to private foundations: A grant to a private foundation requires the private foundation making the contribution to exercise “expenditure responsibility.” If there is an interest in counting the contribution as part of the 5% payout requirement, further rules must be followed by the receiving foundation.
- Grants for or engaging in advocacy: A private foundation may make some types of grants for the purpose of influencing public policy, but specific rules must be followed depending on the specified purpose of the grant, the type of organization, and the message communicated. Foundations may engage in certain types of advocacy, as well, as long as they adhere to certain rules.