Although Private Foundations are nonprofit organizations generally exempt from income tax, they operate under a specific subset of rules under the tax code. Notably, there are very different requirements for grants that Private Foundations (PFs) are allowed to make compared to public charities.
Grants to Public Charities and Private Operating Foundations (POFs)
- These are qualifying distributions, unless the recipient organization is controlled by the PF (excepting certain types of Supporting Organizations).
- The PF is required to determine that the recipient is one of these two eligible types.
- This can be accomplished by viewing the EO Select Check on the IRS website at https://www.irs.gov/charities-non-profits/exempt-organizations-select-check, which maintains an updated list of approved non-profit organizations and indicates their charitable status.
- Another alternative is to ask the intended recipient organization for a copy of their IRS determination letter and their most recent Form 990.
Contributions to Organizations Other Than Public Charities or POFs
- These are qualifying distributions only if the PF exercises “expenditure responsibility.”
- Expenditure responsibility requires the following –
- A written agreement from the recipient organization, signed by one of their officers or board members, specifying that they will use the donated funds for an agreed-upon purpose or program;
- Annual or more frequent follow-up reports from the recipient demonstrating that all funds were so used; and
- An attachment to the annually filed Form 990-PF containing a summary of each of these grants, including grantee, amount, purpose, reporting, any diversions, and verification.
- If the PF does not exercise expenditure responsibility, the PF would be subject to an excise tax on these payments and those grants would not count towards the annual required total charitable expenditures.
- All scholarship programs run by PF organizations must be approved by the IRS.
Written by: Janet Foote, CPA
Janet Foote is a tax manager at Thompson Greenspon and joined the firm in 2001 after several years with a local CPA firm in the Northern Virginia area. With more than 20 years of experience, her responsibilities for the firm are primarily tax research, support and review. She has worked with a variety of clients including nonprofit organizations, as well as estates, trusts and individuals.
Janet earned her Bachelor of Business Administration from Baylor University. She has increased and maintained her knowledge of accounting rules and tax law changes through attendance at educational programs provided by the American Institute of Certified Public Accountants. She regularly attends continuing professional education programs in the nonprofit, estate and trust areas.
Janet is a member of the American Institute of Certified Public Accountants and the Virginia Society of Certified Public Accountants. In addition, she is an active member in the local community of Loudoun County and has served in various leadership and volunteer positions through schools and church.
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