A private grant is money awarded by a non-government funder — typically a private foundation, a corporate foundation, or a community foundation — to a nonprofit organization or individual for a specific project or purpose. The money flows from the private sector rather than a government agency, and it comes with IRS-driven rules about how it’s awarded, spent, and reported. For nonprofits, grant revenue used for exempt purposes generally isn’t taxed. For individuals, it sometimes is. And on both sides of the transaction, the paperwork matters.
Private foundations alone are required to pay out at least 5% of their investment assets each year, which pushes billions of dollars into the grant pipeline annually and is a major reason foundations actively look for qualified recipients.
Who Awards Private Grants
Three types of funders dominate the private grant world, and the differences among them affect how you apply and what strings come attached.
Private foundations are the most common source. They qualify for tax-exempt status under Internal Revenue Code Section 501(c)(3) and are usually funded by a single source: a wealthy individual, a family, or a corporation. Because the funding is concentrated rather than public, the IRS classifies them as private foundations by default unless they notify the IRS otherwise.1Office of the Law Revision Counsel. 26 USC 508 – Special Rules With Respect to Section 501(c)(3) Organizations That classification brings heavier IRS oversight than public charities face, including the mandatory 5% annual payout under IRC Section 4942.2Office of the Law Revision Counsel. 26 USC 4942 – Taxes on Failure to Distribute Income
Corporate foundations are legally separate from the companies that fund them. They operate like other private foundations but tend to direct grants toward causes tied to the parent company’s industry or values. Some corporations skip the foundation structure and give directly from operating budgets, which is faster but forfeits the long-term tax planning a foundation offers.
Community foundations pool donations from many local donors to support regional causes. Most qualify as public charities because their support comes from a broad base. For applicants, that usually means simpler applications, faster decisions, and fewer IRS-driven restrictions on how the grant can be structured.
How the Money Can Be Used
Private grants fund a defined purpose — a program, a research project, a scholarship, a specific organizational need — and the grant agreement locks that purpose in. Foundations rarely hand over unrestricted cash. The stated scope in your application becomes the boundary of what you can spend the money on, and straying outside it can trigger a demand to return the funds.
Two categories of restriction come from IRS rules rather than the individual foundation. First, foundation grants generally can’t fund lobbying or political campaign activity, because the foundation itself would face excise taxes under IRC Section 4945 for making that kind of grant.3Internal Revenue Service. Political and Lobbying Activities – Private Foundations That prohibition flows into the grant agreement and binds the recipient too. Second, grants to organizations that aren’t public charities are treated as taxable expenditures unless the foundation exercises “expenditure responsibility” — a formal oversight process requiring written commitments from the grantee, annual reports, and detailed IRS disclosures about how the money was spent.4Internal Revenue Service. IRC Section 4945(h) – Expenditure Responsibility
Grants to Nonprofits
When a 501(c)(3) nonprofit receives a private grant, the funds are generally not taxable income, because the organization’s exempt status means grant revenue used for its exempt purposes doesn’t trigger federal income tax. The foundation still has to report the grant on Form 990-PF, disclosing the recipient’s name, address, the amount, and the purpose.5Internal Revenue Service. Private Foundations That return is publicly available, so both sides of the transaction are on the record.
Grants to Individuals
Individuals can receive private foundation grants, but the tax treatment gets complicated. A grant used as a scholarship is tax-free if the recipient is a degree-seeking student at a qualifying educational institution and uses the funds for tuition, fees, books, supplies, and required equipment.6Internal Revenue Service. Topic No. 421, Scholarships, Fellowship Grants, and Other Grants Amounts used for room, board, or travel generally don’t qualify for the exclusion and are taxable to the recipient.
Non-scholarship grants to individuals — for artistic achievement, research, or similar purposes — may also escape tax if the grant qualifies as a prize excludable under IRC Section 74(b) or if its purpose is to achieve a specific objective or enhance a skill or talent. The foundation must have its grant-making procedures approved by the IRS in advance and select recipients on an objective, nondiscriminatory basis.7Internal Revenue Service. Advance Approval of Grant-Making Procedures If you’re unsure whether your grant is taxable, talk to a tax professional before filing; the default assumption is that the money counts as income.
What You Need to Apply
Nonprofit applicants should have several documents ready before approaching any foundation. The central one is an IRS determination letter confirming tax-exempt status. Copies of determination letters issued from 2014 onward are available through the IRS Tax Exempt Organization Search tool; older letters require Form 4506-B.8Internal Revenue Service. EO Operational Requirements: Obtaining Copies of Exemption Determination Letter From IRS You’ll also need the organization’s EIN and a mission statement that connects your work to the foundation’s funding priorities.
Financial documents are where most applications succeed or fail. Foundations typically want:
- A detailed project budget covering personnel, equipment, indirect costs, and contingency
- Your most recent IRS Form 990, and sometimes audited financial statements
- A current list of board members with professional affiliations, for conflict-of-interest screening
- Brief biographies of the program directors who would oversee the project
Every figure in the budget needs to match the narrative in the proposal. Reviewers spot inconsistencies quickly, and they tend to read mismatches as sloppy management rather than honest mistakes.
How Submission Usually Works
Many foundations require a Letter of Inquiry before they’ll accept a full proposal. An LOI is a short pitch — a problem statement, your approach, the tie to the foundation’s mission, and a rough budget and timeline. Submitting a full proposal when a foundation only asked for an LOI is a fast way to get disqualified.
Once invited to submit, most foundations use online portals with account creation, digital forms, and document uploads in specific formats. Some family foundations still take hard-copy submissions by mail. Read the submission instructions carefully: character limits, required attachments, and file-naming conventions vary, and technical noncompliance can knock out an otherwise strong proposal.
Review timelines vary widely. Smaller family foundations may respond in six to eight weeks; larger foundations with competitive programs commonly take three to six months. Some conduct site visits or ask follow-up questions before deciding.
What Happens After You Receive a Grant
Accepting a private grant means entering a binding agreement about how the money gets spent, tracked, and reported. Those obligations are enforceable contract terms, and they’re often more detailed than new grantees expect.
Grant agreements typically require periodic progress reports documenting specific milestones and measurable outcomes. When expenditure responsibility applies (because the recipient isn’t a public charity), the IRS requires the grantee to sign a written commitment to submit full annual reports on how funds were spent, keep records of all receipts and expenditures, and make the books available to the grantor on request.9Internal Revenue Service. Terms of Grants: Private Foundation Expenditure Responsibility The grantee also agrees not to use funds for lobbying, political activity, or any purpose outside the grant’s stated scope.
Even when expenditure responsibility doesn’t technically apply, most foundations impose similar reporting requirements contractually. Expect to document how funds were allocated across budget categories, report on quantitative outcomes, and sometimes provide qualitative assessments through narrative reports or surveys.
Record Retention
The IRS requires exempt organizations to keep books and records sufficient to show compliance with tax rules. In practice, grant-related financial records — receipts, invoices, contracts, correspondence — should be kept for at least seven years, which covers the standard three-year audit window plus extensions for substantial understatements or fraud. Grant agreements sometimes specify their own retention periods, and the longer requirement controls.
If Something Goes Wrong
Foundations can demand the return of unspent or misspent funds. Clawback provisions are standard in most grant agreements and explicitly required by the IRS for expenditure-responsibility grants.9Internal Revenue Service. Terms of Grants: Private Foundation Expenditure Responsibility Organizations that mismanage grant funds also risk being cut off from future grants by that foundation and others. In cases of outright fraud or gross mismanagement, breach-of-contract litigation is a real possibility.
The simplest protection is accurate, contemporaneous record-keeping. Organizations that track spending in real time and communicate proactively with their grantors almost never end up in clawback disputes. The ones that scramble to reconstruct records after a reporting deadline are the ones that get into trouble.