Many foundations find amazing charitable programs and organizations that they’d like to support, but shy away from making grants because the organization isn’t recognized as a 501(c)(3) public charity. They have concerns not only about how to direct funds to these recipients, but also about how their funds will be used after the check is cashed.
As long as your grant is for a charitable purpose, Foundation Source can help you fund these organizations through the processes of Expenditure Responsibility and Equivalency Determination. Depending on the circumstances, one or the other of these processes might be applicable for giving to organizations that are not classified as public charities by the IRS, including:
Non-501(c)(3) Tax-Exempt Organizations
Civic associations, veterans groups, business leagues, and other types of tax-exempt organizations often carry out valuable charitable work, even if they aren’t classified as 501(c)(3) public charities by the IRS.
Example: The local Veterans of Foreign Wars (VFW) Post is engaged in a large outreach to the families of Iraq and Afghanistan war veterans. A private foundation could help by funding the various assistance programs of this local VFW Post, even though the VFW is not a 501(c)(3) organization.
Private foundations can give to both operating and non-operating foundations.
Example: A family fun park designed for children and adults with special needs, is a place where they can enjoy outdoor recreation, an ultra-accessible carousel, train rides with wheelchair accessible cars, Braille signage, and service animal rest areas…all made possible by a private operating foundation, which another private foundation could grant to using these processes.
Businesses often run effective charitable programs that can further your foundation’s objectives.
Example: A local restaurant has started a new program in which patrons can donate to an “emergency relief fund” when paying their bill to support families that cannot afford the cost of fuel to heat their homes. A private foundation could fund this program even though it resides in a for-profit entity.
Your private foundation can grant to almost any organization doing charitable work, no matter where it’s located.
Example: Imagine that someone on your foundation read an article about an orphanage in Romania struggling to meet the needs of the abandoned infants and toddlers in its care. Although not registered with the IRS, the orphanage is clearly doing charitable work, so your foundation could support its efforts.
Questions and Answers
Q: When would my foundation use one process instead of the other?
A: If you’d like to support an organization that is not recognized by the IRS, you could use either process to grant compliantly. Expenditure Responsibility grants are generally targeted to a specific project, whereas Equivalency Determination gives you more freedom to support the organization’s overhead and operating expenses. Here are the circumstances under which each process might be applicable:
The Expenditure Responsibility process enables your foundation to fund a project run by an organization that lacks a 501(c)(3) designation as a public charity. It ensures that the organization is capable and willing to use the grant funds for charitable purposes
Because it is project-specific, the Expenditure Responsibility process must be repeated for each individual grant, even if the last grant was just weeks ago. Foundation Source will manage this entire process for you, collecting the background information for your evaluation, structuring the grant agreement, collecting follow-up reports, and making sure it’s all reported properly on your 990-PF annual return.
If you anticipate making repeated grants to one specific organization, and you believe that despite its lack of standing with the IRS, it is essentially functioning as if it were an IRS-recognized 501(c)(3) public charity, you may wish to obtain an Equivalency Determination. Equivalency Determination is a longer, more involved process than Expenditure Responsibility because it compares the organization’s finances and operations with those of an IRS-recognized 501(c)(3) public charity. However, once you have an Equivalency Determination, you can issue unlimited grants to that grantee with just periodic updates to make sure there haven’t been major changes to the organization’s purpose or structure.
Q: How do I know which option to choose?
A: Our experts can help you decide which option is best for your specific needs, taking into account the size and timing of the proposed grant, as well as your relationship with the organization. Once the best route is identified, we will facilitate the rest of the process.