Can Private Foundations Receive Grants?

Private foundations are primarily known for disbursing funds to charitable causes, leading many to view them as grant-making entities. However, private foundations can also receive grants. This process involves distinct rules and considerations that vary significantly depending on the grant source.

Defining Private Foundations

All organizations recognized by the Internal Revenue Service (IRS) as tax-exempt under Section 501(c)(3) are classified as either a private foundation or a public charity. This classification is primarily based on the level of public involvement in an organization’s activities and its funding sources. A private foundation typically receives financial support from a limited number of sources, such as an individual, a family, or a corporation, and often has a small, concentrated group controlling its operations.

In contrast, public charities generally derive a substantial portion of their financial support from a broad base of public contributions or government units. The IRS presumes any new 501(c)(3) organization to be a private foundation unless it actively demonstrates and qualifies for public charity status. Because private foundations are less subject to broad public scrutiny, they face more stringent operating restrictions and excise taxes for non-compliance with specific regulations.

Grants from Public Charities, Individuals, and Government

Private foundations can receive grants from public charities, individual donors, and governmental entities. The process for receiving funds from these sources is uncomplicated. Such grants are treated similarly to how any public charity might receive funding for its operations or specific projects.

These grants do not trigger complex regulatory requirements, such as expenditure responsibility, which apply when grants are made between private foundations. For instance, a public charity might award a grant to a private foundation for a research initiative, or a government agency could fund a community development project undertaken by a private foundation. Individual donors can also contribute directly to private foundations to support their charitable mission or a particular program.

Grants from Other Private Foundations

When a private foundation receives a grant from another private foundation, the grant-making foundation must exercise “expenditure responsibility” over the grant. This IRS mandate ensures funds are used exclusively for charitable purposes and do not result in a “taxable expenditure” for the grantor. Expenditure responsibility applies unless the recipient is a public charity or an exempt operating foundation.

Exercising expenditure responsibility involves specific actions by the grant-making private foundation. Before the grant, the grantor must conduct a pre-grant inquiry to assess the grantee’s ability to fulfill the charitable purpose. A written grant agreement is necessary, outlining fund use, requiring repayment of misused funds, and committing the grantee to provide regular reports. The grant-making foundation must obtain reports from the recipient on how funds are spent and report these expenditures to the IRS on its annual Form 990-PF.

Operational and Reporting Considerations

Receiving grants impacts a private foundation’s operational and reporting obligations. This includes the annual distribution requirement, known as the 5% payout rule. Under this rule, a private foundation must distribute at least 5% of the average fair market value of its non-charitable-use assets each year for charitable purposes. Grants received by a private foundation are not counted as part of its own qualifying distributions for this payout requirement.

The recipient private foundation must cooperate with any expenditure responsibility requirements imposed by the grantor, including providing regular financial and programmatic reports. All private foundations must file Form 990-PF annually with the IRS. This form provides financial information, including all grants received, which are reported as revenue. The Form 990-PF is a public document, ensuring transparency in the foundation’s financial activities and compliance with tax regulations.