More-Than-Incidental Benefit Rules for Donor-Advised Funds

A donor-advised fund grant creates a “more than incidental benefit” whenever it gives the donor, a person with advisory privileges, or certain family members something of real economic value in return, and Section 4967 of the Internal Revenue Code taxes that benefit at 125% of its value. The statute never spells out where the line sits, so IRS Notice 2017-73 supplies the working rules until proposed regulations are finalized.¹ The practical takeaway: a DAF grant is not the place to buy anything, satisfy anything, or attend anything.

How the IRS Defines the Standard

Section 4967 imposes excise taxes when a DAF distribution results in a donor, donor advisor, or related person receiving a benefit that is “more than incidental,” but the statute leaves that phrase undefined.² The IRS has been working on regulations since 2017, and as of 2026 those regulations remain on the Priority Guidance Plan but have not been finalized. Taxpayers may rely on Notice 2017-73 in the meantime.

One point the IRS has been explicit about: DAF grants are not analyzed the way direct charitable contributions are analyzed under Section 170. When you give directly to a charity and receive something in return, Section 170 lets you deduct the portion that exceeds the fair market value of what you got. The IRS has rejected applying that same framework to DAF distributions.¹ A donor who wants goods or services from a charity should pay for them personally. In effect, the standard for DAF grants is stricter than the one that governs your own checkbook.

Who the Rules Cover

The prohibited benefit rules reach well beyond the person who originally funded the account. They apply to anyone with advisory privileges over the fund and to a defined group of related persons. Under Section 4958(f)(7), which Section 4967 cross-references, the covered family members include your spouse, ancestors, children, grandchildren, great-grandchildren, and the spouses of your children, grandchildren, and great-grandchildren.³

That scope catches arrangements donors don’t always spot. A grant that pays a daughter-in-law’s professional conference registration, or one that funds a program a parent directly benefits from, triggers the same scrutiny as a grant that benefits you personally. When more than one person is liable for the same distribution, they are jointly and severally responsible, so the IRS can collect the full amount from any one of them.²

Grants That Cross the Line

Event Tickets, Auctions, and Galas

The clearest violation is using a DAF grant to buy tickets to a gala, benefit concert, sporting event, or any other occasion where the donor gets to attend. Even when the charity splits the ticket price into a “tax-deductible portion” and a “fair market value” portion, DAF grants cannot cover any part of it. Notice 2017-73 treats a grant that enables attendance at a charity-sponsored event as conferring a more-than-incidental benefit, full stop.¹

The same reasoning applies to silent auctions, live auctions, and raffles. The charitable setting doesn’t change the fact that fund assets are being exchanged for something of value.

Memberships With Real Perks

Museum memberships, zoo passes, and similar arrangements often bundle genuine perks: free admission, parking, gift shop discounts, priority access. When those perks have real market value, a DAF grant covering the membership fee creates a prohibited benefit. A membership whose only “benefit” is a newsletter and a logo tote bag can fall within the safe harbor thresholds discussed below. A membership offering unlimited family admission to a $30-per-visit museum does not.

Tuition and Personal Obligations

DAF grants cannot pay tuition, fees, or other educational costs for the donor or any specific individual. The school may be a qualified 501(c)(3), but the grant is satisfying a personal financial obligation, and the IRS treats it the same as paying a personal debt with charitable assets.

The same logic bars any grant that relieves you of money you already owe. Court-ordered payments, contractual obligations, and settlement amounts cannot be paid with DAF distributions. A grant has to be a fresh, voluntary transfer for the public good, not a way to shed an existing liability with tax-advantaged dollars.

Pledges and the Bifurcation Trap

Fulfilling a Personal Pledge

Using a DAF grant to fulfill a pledge you already made sits in a gray area the IRS has addressed directly. Notice 2017-73 says a DAF distribution to a charity where you have an outstanding pledge will not be treated as providing a prohibited benefit, but only if three conditions are all met:

The sponsoring organization does not mention the existence of your pledge when transmitting the grant.
You receive no other more-than-incidental benefit from the distribution.
You do not claim a personal charitable contribution deduction for the DAF distribution, even if the receiving charity mistakenly sends you a written acknowledgment.¹

The third condition is what catches donors off guard. You already took your deduction when you funded the DAF. A second deduction when the DAF pays the pledge is double-dipping, and it independently violates the rules.

Splitting the Ticket

Bifurcation is the practice of paying the non-deductible portion of an event ticket out of pocket while using a DAF grant for the “deductible” portion. The IRS has rejected it. Notice 2017-73 states that a DAF distribution subsidizing a donor’s attendance at a charity-sponsored event confers a more-than-incidental benefit even when the donor personally covers the fair market value of the meal or entertainment.¹ The grant still enables you to be in the room. Pay the full ticket price with personal, after-tax money.

What Is Allowed

Naming Rights and Recognition

Naming rights for buildings, programs, endowments, and scholarships are permissible. The IRS and Treasury have long treated public recognition as having zero economic value for charitable deduction purposes. Being publicly acknowledged, or having your name on a building or a scholarship fund, is not a return benefit that reduces the charitable nature of a grant. The same treatment applies to DAF distributions.

Token Items and Safe Harbor Numbers

Charities routinely send small thank-you items. Those are fine as long as they qualify as “low-cost articles” under the safe harbor rules originally in Revenue Procedure 90-12 and adjusted annually for inflation. For 2026, the key thresholds are:⁴

Low-cost article limit: $13.90 per donor per year. Multiple items are added together.⁵
Minimum contribution for token items: $69.50. The donor’s payment must reach this amount before the token-item safe harbor applies.
The 2% / $139 rule: benefits are insubstantial if their fair market value is no more than 2% of the contribution or $139, whichever is less.

These figures originate in the Section 170 context, but they give a practical benchmark for evaluating a DAF-grant benefit. The cleanest approach is still a grant with no return benefit at all.

Scholarships Funded by a DAF

Scholarship funds require structural care. A fund where the donor personally picks recipients starts to look like a personal spending account rather than a charitable vehicle. To stay within the DAF framework, the IRS requires that selection be handled by a committee appointed by the sponsoring organization, that no combination of donors or donor advisors controls the committee, and that grants be awarded on an objective and nondiscriminatory basis under a procedure the sponsoring organization’s board approved in advance.⁶

A donor can sit on the selection committee, but only as one member among others appointed by the sponsoring organization, with no deciding vote, no majority, and no ability to earmark funds for a specific person. Meet those conditions and the fund can make grants to individuals for study, travel, or similar purposes under Section 4945(g).⁷ Miss them and the account may not even qualify as a donor-advised fund under the statutory definition.

The 125% Tax and How It Gets Reported

Section 4967 imposes a two-part excise tax:²

On the donor, donor advisor, or related person: 125% of the value of the prohibited benefit. A $1,000 benefit produces a $1,250 tax bill. The percentage intentionally exceeds the benefit’s value so there is no economic upside to the violation.
On the fund manager: 10% of the benefit amount, capped at $10,000 per distribution, and only when the manager knowingly approved the distribution.

Unlike other Chapter 42 excise taxes, Section 4967 has no correction period and no second-tier escalation. The taxes must be paid from personal funds; the sponsoring organization cannot cover the liability, and the DAF’s assets cannot be used.⁸ When more than one person is liable, they are jointly and severally on the hook.

Everyone who advised the distribution or received the benefit files IRS Form 4720 and completes Schedule L (Taxes on Prohibited Benefits Distributed From Donor Advised Funds). The deadline is the 15th day of the 5th month after the end of the filer’s tax year, which for most individuals is May 15.⁸ The sponsoring organization also reports the transaction on Schedule L but does not pay the excise tax itself.

Skipping the filing doesn’t erase the liability; it adds non-filing penalties on top of it. If you recognize after the fact that a grant produced a prohibited benefit, filing and paying is better than waiting for the sponsoring organization’s next examination to surface it.

1
Internal Revenue Service. Notice 2017-73 – Request for Comments on Application of Excise Taxes With Respect to Donor Advised Funds in Certain Situations
2
Office of the Law Revision Counsel. 26 USC 4967 – Taxes on Prohibited Benefits
3
Office of the Law Revision Counsel. 26 USC 4946 – Definitions and Special Rules
4
Internal Revenue Service. Revenue Procedure 2025-32
5
Office of the Law Revision Counsel. 26 USC 513 – Unrelated Trade or Business
6
Internal Revenue Service. Donor Advised Funds Guide Sheet Explanation
7
Internal Revenue Service. Grants to Individuals
8
Internal Revenue Service. Instructions for Form 4720