Taxable expenditures are grants or expenditures made by a private foundation that are either prohibited, or in Internal Revenue Service (IRS)-specified areas without following the strict IRS rules. The following list provides brief descriptions of those expenditures that are completely prohibited; the list after that provides additional requirements to avoid being taxable expenditures.
The following expenditures are prohibited:
- Influencing public elections—Not only is the foundation likely to face significant penalties for participating in an election but this activity may be grounds for revocation of the foundation’s tax-exempt status.
- Noncharitable activities—A grant or questionable administrative expenditure for noncharitable purposes by a private foundation may subject the organization to penalties.
- Lobbying—This refers to any activity made to influence legislation. Foundations may try to influence public policy but by means other than lobbying legislators.
The following expenditures are allowed, but you must comply with specific IRS rules:
- Grants to individuals—Your foundation 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, but you should seek legal counsel to ensure the purposes are charitable and appropriate recordkeeping is done.
- Grants to non-U.S. organizations—Foundations may give to foreign organizations; however, they must have either 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.
- Grants to certain supporting organizations (509(a)(3) public charities)—Foundations must exercise expenditure responsibility when making grants to Type I, II, or III supporting organizations if any foundation insiders or disqualified persons directly or indirectly control either the supporting organization or its supported organization. Foundations must do the same with nonfunctionally integrated Type III supporting organizations. In addition, these grants will not, under any circumstances, count toward the foundation’s 5% distribution requirement. Grants to supporting organizations in all other circumstances can be treated as grants to any other 509(a)(1) or (2) public charity.
- Grants to U.S. organizations that are not public charities—Your foundation may give to an organization that is not a public charity (e.g., Rotary Club, chamber of commerce) if the grant is for charitable purposes, but you must follow extra procedures called expenditure responsibility.
- Grants to private foundations—A grant to a private foundation requires the private foundation making the contribution to exercise expenditure responsibility. If there is an interest in counting the contribution as part of the 5% payout requirement, the receiving foundation must follow further rules.
- Grants for or engaging in advocacy—A private foundation may make some types of grants for the purpose of influencing public policy, but specific rules must be followed, depending on the specified purpose of the grant, the type of organization, and the message communicated. Foundations may engage in certain types of advocacy too, if they adhere to certain rules.