1. Administrative Expenses
As an initial matter, all administrative expenses must be “reasonable and necessary” to count toward the distribution requirement. “Reasonable and necessary” expenses are those that are directly attributable to running your foundation’s charitable programs, such as reasonable personnel and overhead costs, fundraising expenses, travel for site visits, and accounting and tax services. It’s important to note, however, that the portion of your administrative expenses attributable to the production of income (i.e., investments) will not be a qualifying distribution. Therefore, it is important to allocate your expenses between charitable activities and income production. If a portion of your staff’s time is devoted to each, you must allocate their salaries accordingly when assigning administrative expenses to the minimum payout requirement.
2. Grants to 509(a)(1) and 509(a)(2) Public Charities
Grants for charitable purposes will likely comprise the bulk of your foundation’s required distributions. These include grants made directly to a subset of 501(c)(3) public charities – those that are designated as 509(a)(1) and (2) public charities. You can easily make grants to these public charities just by verifying their IRS status. There are few documentation requirements for these organizations, but you still must comply with the restrictions against lobbying, influencing public elections, and special rules for funding advocacy. It is critical that you check the grantee’s current status by either confirming the status online using services such as GuideStar or requiring grantees to provide a copy of their IRS determination letter and attest to it being current in a grant agreement.
3. Grants to Governmental Units
As with grants to public charities, making grants to governmental units is also fairly straightforward. Such units, however, won’t have a determination letter or be listed at www.guidestar.org. Therefore, to ensure that the organization in question is a governmental unit, you can usually obtain documentation of the grantee’s governmental status (such as a copy of the legislative action creating the governmental unit in question).
Check out our Legal Essentials for Small Foundations to learn what grants require a little extra attention »
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