Private foundation taxable expenditures are grants or expenditures prohibited by the IRS.
The IRS prohibits these taxable expenditures:
- Influencing public elections: There are significant penalties for participating in an election, and this may be grounds for revoking the foundation’s tax-exempt status.
- Noncharitable activities: A grant or questionable administrative expenditure for noncharitable purposes may subject the private foundation to penalties.
- Lobbying: Foundations may try to influence public policy, but by means other than lobbying legislators.
The IRS allows the following grants and expenditures, but they must comply with specific rules:
- Individuals: Foundations must receive prior approval from the IRS to give grants to individuals for travel, study, or similar purposes. Grants to individuals for other purposes, such as disaster relief, do not need IRS approval. However, you should seek legal counsel to ensure appropriate recordkeeping, and that the purposes are charitable.
- Non-U.S. organizations: Foundations may give to foreign organizations. However, they must have an equivalency determination that verifies the organization is equivalent to a U.S. public charity. Or the foundation must follow extra procedures called expenditure responsibility.
- Certain supporting organizations (509(a)(3) public charities): If foundation insiders or disqualified persons directly or indirectly control the supporting organization (or its supported organization) the foundation must exercise expenditure responsibility when making grants to Type I, II, or III supporting organizations. Foundations must do the same with nonfunctionally integrated Type III supporting organizations. These grants do not, under any circumstances, count toward the foundation’s 5% distribution requirement. You can treat grants to supporting organizations in other circumstances as grants to any other 509(a)(1) or (2) public charity.
- U.S. organizations that are not public charities: Your foundation may give to an organization that is not a public charity if it’s for charitable purposes. But you must follow extra procedures called expenditure responsibility.
- Private foundations: The private foundation making the contribution must exercise expenditure responsibility. If you want to count the contribution towards your 5% payout requirement, the receiving foundation must follow extra rules.
- Engaging in advocacy: A private foundation can make certain grants to influence public policy. However, depending on the type of organization, the grant’s purpose, and messages communicated, you must follow specific rules.