A private foundation can give money to public charities, individuals, foreign organizations, for-profit businesses running charitable projects, and other private foundations. Each category past the first one adds paperwork, oversight, or both. Two IRS rules shape every decision about where the money goes: the foundation must distribute at least 5% of its investment assets each year or face a 30% excise tax on the shortfall,1Office of the Law Revision Counsel. 26 USC 4942 Taxes on Failure to Distribute Income and any grant that goes to the wrong recipient or lacks required oversight can be reclassified as a “taxable expenditure,” triggering a 20% penalty on top.2Office of the Law Revision Counsel. 26 USC 4945 Taxes on Taxable Expenditures What follows is who qualifies as a recipient, and what each type requires.
Public Charities
Direct grants to organizations classified as public charities under Section 501(c)(3) are the simplest path. Hospitals, universities, religious organizations, and community-based groups that pass the “public support test” fall under Section 509(a)(1) or 509(a)(2). Supporting organizations that further the work of one or more public charities fall under Section 509(a)(3).3Internal Revenue Service. Exempt Purposes – Internal Revenue Code Section 501(c)(3)
Grants to these organizations count as qualifying distributions toward the 5% payout with no additional oversight burden. The foundation doesn’t need to track how the charity spends the money or file special reports on the grant. For most foundations, this is where the bulk of annual distributions go.
One side effect to watch: a large foundation grant can accidentally cause a small public charity to fail its public support test. When a single donation shifts the recipient’s revenue mix too heavily toward one source for two consecutive years, the IRS can reclassify the charity as a private foundation. The grantor isn’t penalized, but the recipient’s operations and tax status can be disrupted. Foundations making outsized grants to small organizations often space payments over multiple years or review the charity’s financials first.
Before wiring funds, confirm the recipient’s status through the IRS Tax Exempt Organization Search, which lets you look up an organization by name or EIN and check whether it appears in the Publication 78 database.4Internal Revenue Service. Search for Tax Exempt Organizations The organization’s determination letter provides additional confirmation of its specific classification.
Individuals
Private foundations can give money directly to people. The rules split based on what the grant is for.
Scholarships, Fellowships, and Travel Grants
A grant to an individual for study, travel, or a similar purpose is automatically a taxable expenditure unless the foundation’s grant procedure has been approved in advance by the IRS under Section 4945(g).5eCFR. 26 CFR 53.4945-4 Grants to Individuals To secure approval, the foundation submits a description of its selection process, the criteria it uses, how it supervises grantees, and how it handles funds that might be misused. The IRS has 45 days to respond; if the foundation hasn’t heard back by then, the procedures are considered approved.
Selection criteria must be objective and nondiscriminatory. Academic performance, financial need, and community involvement are typical standards that satisfy the IRS. The foundation also has to track recipients’ progress and obtain reports showing the funds were used for the stated purpose.
A common question is whether children or relatives of the foundation’s major donors can receive scholarships. The answer isn’t a flat no. Company-sponsored scholarship programs run by private foundations may give preference to employees and their children if the program meets specific conditions: an independent selection committee, criteria based primarily on educational merit rather than the employment relationship, and a limited probability that any given employee’s child will actually receive a scholarship.6Internal Revenue Service. Company Scholarship Programs Outside that narrow structure, grants that benefit a founder’s family can cross into self-dealing.
Disaster Relief and Hardship Grants
Grants to help people affected by natural disasters, medical emergencies, or sudden financial hardship don’t fall under the “travel, study, or similar purposes” category and don’t require IRS pre-approval of grant procedures. The foundation still needs to document the charitable purpose, establish that recipients come from a broad and identifiable class of people in need, and keep records showing the assistance was appropriate. A well-documented program with clear eligibility criteria is on solid ground; picking friends of the board is not.
Foreign Organizations
The IRS doesn’t automatically recognize non-U.S. nonprofits as public charities, so a foundation can’t simply write a check to a foreign organization the way it would to a domestic 501(c)(3). Two paths exist.
Equivalency Determination
The foundation, or a qualified tax practitioner it hires, reviews the foreign organization’s governing documents, financial records, and activities to decide whether it would qualify as a U.S. public charity under domestic standards. If it would, the foundation can treat the grant much like one to a domestic charity. The analysis must come from a U.S. attorney, CPA, or enrolled agent. Outside counsel typically charges $5,000 to $15,000 for a single equivalency determination, though centralized services that process these in bulk cost less.
Expenditure Responsibility
When an equivalency determination isn’t practical, the foundation can still make the grant by exercising expenditure responsibility, described in more detail below. Either path lets the grant count as a qualifying distribution; skipping both creates a taxable expenditure.
International grants carry an additional compliance layer. Federal law requires U.S. persons, including foundations, to avoid transactions with individuals or entities on the Treasury Department’s Specially Designated Nationals list. OFAC recommends a risk-based compliance program that includes screening potential grantees before funds move.7Office of Foreign Assets Control. Counter Terrorism Sanctions A free online search tool is available. Failing to screen is a potential federal sanctions violation.
For-Profit Businesses and Other Non-Charitable Entities
Private foundations can fund specific charitable projects run by for-profit businesses, 501(c)(4) social welfare organizations, or other entities that aren’t public charities. The money can’t go toward general operations; it must be earmarked for a defined charitable purpose. To make this work, the foundation exercises expenditure responsibility, which imposes several requirements:
- A pre-grant inquiry into whether the recipient is capable of carrying out the charitable project.
- A written agreement specifying how the funds will be used, requiring the grantee to return any unused money, and prohibiting use of the grant for lobbying or political activity.
- A separate account at the grantee, holding the foundation’s money apart from its own assets for as long as any grant funds remain unspent.8eCFR. 26 CFR 53.4945-6 Expenditures for Noncharitable Purposes
- Annual reports from the grantee detailing how the money was spent, which the foundation includes in its Form 990-PF.
Drop any of these and the grant becomes a taxable expenditure. The foundation owes an initial tax of 20% of the grant amount. Any foundation manager who knowingly approved the grant owes 5% personally, capped at $10,000 per expenditure. If the problem isn’t corrected within the correction period, the foundation’s penalty jumps to 100% of the grant.2Office of the Law Revision Counsel. 26 USC 4945 Taxes on Taxable Expenditures
Other Private Foundations
A private foundation can grant to another private foundation, but conditions apply to whether that grant counts as a qualifying distribution. Contributions to a non-operating private foundation generally don’t count toward the grantor’s 5% payout unless the receiving foundation redistributes the funds as qualifying distributions by the end of the tax year following receipt, or the grantor exercises expenditure responsibility over the grant.1Office of the Law Revision Counsel. 26 USC 4942 Taxes on Failure to Distribute Income
Grants to operating foundations, which spend most of their money directly on charitable programs rather than making grants, are treated more like grants to public charities and don’t carry the same restrictions. Foundations also can’t make grants to organizations they or their disqualified persons control unless the same conditions are satisfied. Most foundations avoid this route when a direct grant to a public charity accomplishes the same goal.
Program-Related Investments
Not every qualifying distribution has to be a grant. A foundation can invest in for-profit or nonprofit ventures when the primary purpose is charitable rather than financial return. These program-related investments count toward the 5% payout.9Internal Revenue Service. Qualifying Distributions In General Common examples include below-market-rate loans to affordable housing developers, equity investments in social enterprises, and loan guarantees for organizations that can’t access traditional credit.
The investment’s primary purpose has to be a charitable goal, not income. A financial return is fine, but profit can’t be the driver. When a PRI is repaid or sold, the returned funds go back into the foundation’s asset base and must be distributed again in future years to keep meeting the 5% threshold.
Who a Private Foundation Cannot Give Money To
Two categories are off-limits regardless of how charitable a transaction might look.
Disqualified Persons and Self-Dealing
Section 4941 bans virtually all financial transactions between a private foundation and its “disqualified persons,” a group that includes substantial contributors, officers and directors, their family members, and businesses they control.10Office of the Law Revision Counsel. 26 USC 4941 Taxes on Self-Dealing Prohibited transactions include selling or leasing property between the foundation and a disqualified person, lending money in either direction, paying unreasonable compensation, and transferring foundation income or assets for a disqualified person’s benefit.
Penalties are aggressive. A disqualified person who engages in self-dealing owes an initial tax of 10% of the amount involved. If the transaction isn’t corrected within the taxable period, that jumps to 200%. A foundation manager who knowingly participated owes 5% initially, capped at $20,000 per act, and 50% if they refuse to help correct the problem.11Internal Revenue Service. Taxes on Self-Dealing Private Foundations
Foundations get into the most trouble here, often without meaning to. A board member’s company providing office space to the foundation at fair market rent is still self-dealing. Buying a table at a gala hosted by a board member’s charity can trigger it. The IRS doesn’t care whether the transaction was at arm’s length or even favorable to the foundation. With narrow exceptions for reasonable compensation for personal services, the prohibition is nearly absolute.
Lobbying and Political Campaigns
Any amount a private foundation spends trying to influence legislation or the outcome of a public election is a taxable expenditure, carrying the same 20% initial tax. This is stricter than the rule for public charities, which may lobby if it remains an insubstantial part of their activities. For private foundations, the line is essentially bright.
A foundation can still make general-support grants to public charities that happen to lobby, provided the grant isn’t earmarked for lobbying. It can also fund nonpartisan research and educational activities on policy issues. The distinction between educating the public on a topic and urging action on specific legislation is where most disputes live.
Before the Money Moves
A written grant agreement should be in place before any funds transfer, even for domestic grants to public charities where expenditure responsibility isn’t required. The agreement establishes the charitable purpose, any restrictions on use, and reporting expectations. For grants requiring expenditure responsibility, the written agreement is legally mandatory, and the grantee should provide a signed acknowledgment confirming receipt. Each distribution gets tracked against the foundation’s minimum payout obligation and reported on Form 990-PF, which is publicly available.