Taxable expenditures are grants or payments that private foundations are prohibited from making under IRS rules. These expenditures can result in significant penalties and, in some cases, the loss of tax-exempt status.
Prohibited Taxable Expenditures
The IRS specifically prohibits private foundations from making the following:
- Influencing public elections: Participating in or funding election-related activity can result in steep penalties and may jeopardize the foundation’s tax-exempt status.
- Noncharitable activities: Grants or administrative expenses that do not serve a charitable purpose may be penalized.
- Lobbying: While foundations can support public policy work, they are not allowed to lobby legislators directly.
Permitted but Regulated Grants and Expenditures
Certain types of grants are allowed but must follow strict IRS guidelines:
- Grants to individuals: Foundations must obtain IRS approval before awarding grants to individuals for travel, study, or similar purposes. Grants for other charitable purposes (such as disaster relief) don’t require prior approval, but it’s best to consult legal counsel to ensure proper documentation and compliance.
- Grants to non-U.S. organizations: These are allowed if the foundation obtains an equivalency determination (confirming the organization is equivalent to a U.S. public charity) or exercises expenditure responsibility (a set of oversight procedures required by the IRS).
- Grants to supporting organizations (509(a)(3)): If insiders of the foundation control the grantee (or its supported organization), expenditure responsibility is required for all types of supporting organizations. Additionally, grants to nonfunctionally integrated Type III supporting organizations must follow expenditure responsibility and do not count toward the foundation’s 5% payout requirement.
- Grants to U.S. organizations that are not public charities: These are permitted for charitable purposes but must follow expenditure responsibility procedures.
- Grants to other private foundations: These also require expenditure responsibility. To count toward your foundation’s 5% annual payout, the recipient must meet additional requirements.
- Advocacy and public policy work: Private foundations may fund advocacy efforts that do not involve lobbying. Specific rules apply depending on the grantee, the purpose of the grant, and the nature of the communication involved.
Disclaimer: While we pride ourselves on our advice, please realize Exponent Philanthropy is not a law or accounting firm. This information contained in this Q&A is being provided for informational purposes only and not as part of an attorney-client relationship. The information is not a substitute for expert legal, tax or other professional advice tailored to your specific circumstances, and may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code. It is our advice that you seek independent counsel, for any tax, accounting or legal issues you may have, related to matters that are of a material concern to you or your organization.
Still have questions?
Members can access staff experts through our Q&A service by calling 202-580-6560, or post a question to the member community to hear form peers in the field.
Explore our Q&A archive