A private foundation can give money to public charities, government agencies, individuals, for-profit businesses, foreign organizations, and other private foundations. Each category is legal, but each carries different oversight requirements under federal tax law, and choosing the wrong recipient or skipping the required procedures can trigger steep excise taxes. The question of who a private foundation can give money to is really a question about how much paperwork comes with the check.
Public Charities and Government Agencies
These are the easiest grants to make. Organizations classified as public charities under Section 501(c)(3) can receive foundation dollars with no ongoing monitoring obligation once the check clears. The same is true for grants to a state, the District of Columbia, a U.S. possession, or any political subdivision of these, which means public schools, municipal libraries, and state-run parks all qualify.1Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts
Before writing a grant, foundations typically confirm the recipient’s status through the IRS Tax Exempt Organization Search tool. If the organization appears there as a public charity, the foundation can generally rely on that listing even if the IRS later revokes the status. That protection disappears if the foundation knew about the revocation, played a role in the conduct that caused it, or provided more than 25 percent of the recipient’s total support over the four preceding tax years.2Internal Revenue Service. Reliance by Grantors on Public Charity Status of Grantees
One wrinkle sits inside the public charity category. Some 501(c)(3)s are classified as “supporting organizations” under Section 509(a)(3). Grants to Type I, Type II, and Type III functionally integrated supporting organizations work like any other public charity grant. Grants to Type III non-functionally integrated supporting organizations are different: the foundation must exercise expenditure responsibility over the funds, and the grant does not count toward the foundation’s annual distribution requirement.
Individuals
Foundations can give money directly to individuals, but only for specific purposes and only after the IRS has approved the selection procedure in advance. The two common categories are educational scholarships and emergency disaster relief. Section 4945(g) requires that any grant to an individual be awarded on an objective and nondiscriminatory basis under a procedure the IRS has cleared.3Internal Revenue Service. IRC Section 4945(g) Individual Grants The rule exists to stop foundations from routing money to friends or family of insiders.
The pool of eligible recipients must be broad enough to constitute a charitable class, and the criteria have to relate to the grant’s purpose. For scholarships, acceptable criteria include academic performance, standardized test scores, instructor recommendations, and financial need. The selection committee evaluates candidates against those criteria, not against personal ties to donors or managers.
A foundation usually submits its individual grant procedures as part of its initial application for tax-exempt status or through a separate advance-approval request. Distribute money to an individual without that approval and the payment is treated as a taxable expenditure, triggering a 20 percent excise tax on the full grant amount.4Office of the Law Revision Counsel. 26 USC 4945 – Taxes on Taxable Expenditures
For-Profit Businesses Through Program-Related Investments
Yes, foundation money can go to for-profit companies, but only through program-related investments, or PRIs. These take the form of below-market loans, loan guarantees, or equity investments. Section 4944(c) exempts PRIs from the jeopardizing-investment rules if the primary purpose is charitable, such as funding affordable housing development or medical research, and financial return is not a significant goal.5Office of the Law Revision Counsel. 26 USC 4944 – Taxes on Investments Which Jeopardize Charitable Purpose
PRIs count as qualifying distributions toward the annual payout requirement.6Internal Revenue Service. IRC Section 4944(c) – Taxes on Investments Which Jeopardize Charitable Purpose – Exception for Program-Related Investments When the business repays a PRI loan, the returned funds become available for future charitable projects. The recipient business must use the money only for the agreed-upon project; if the foundation discovers the funds are being spent on general corporate purposes, it has to take steps to recover the investment.
Foreign Organizations
Grants can cross borders, but the process is more involved than domestic grantmaking. There are three paths, depending on the foreign organization’s relationship with the IRS.
The simplest path applies when the foreign organization already holds an IRS determination letter recognizing it as a 501(c)(3) public charity. That grant works like any domestic public charity grant. When no determination letter exists, the foundation can perform an equivalency determination, which is a good-faith assessment (usually documented by a qualified tax practitioner or attorney) that the foreign organization would qualify as a U.S. public charity based on its governing documents and financial records.7Internal Revenue Service. Grants to Foreign Organizations by Private Foundations
If neither option is available, the foundation must exercise expenditure responsibility. The foreign recipient signs a written agreement committing to use the funds only for the stated charitable purpose, keep the grant money in a separate account, and submit detailed annual reports.8Internal Revenue Service. Terms of Grants – Private Foundation Expenditure Responsibility Skip both the equivalency determination and expenditure responsibility, and the grant becomes a taxable expenditure.
Other Private Foundations and Non-Charitable Entities
Grants to other private foundations, 501(c)(4) social welfare organizations, and other non-charitable entities are permitted, but they always require expenditure responsibility. Section 4945(h) defines that obligation as making reasonable efforts to ensure the grant is spent solely for its stated charitable purpose, obtaining full reports from the grantee, and filing detailed reports with the IRS.4Office of the Law Revision Counsel. 26 USC 4945 – Taxes on Taxable Expenditures
Before issuing the grant, the foundation conducts a pre-grant inquiry into the recipient’s management capacity and financial integrity, typically reviewing recent audited financial statements, the current budget, a list of the governing board and officers, and evidence of legal status. The grantee then signs a written agreement promising to repay any portion not used for the stated purpose, submit annual reports, keep books available for the foundation’s review, and refrain from lobbying, political campaigns, or other activities that would be taxable expenditures if the foundation carried them out directly.8Internal Revenue Service. Terms of Grants – Private Foundation Expenditure Responsibility
Fail to exercise proper expenditure responsibility and the grant becomes a taxable expenditure, carrying an initial tax of 20 percent of the grant amount. If the problem is not corrected within the taxable period, an additional tax of 100 percent applies.9eCFR. 26 CFR 53.4945-1 – Taxes on Taxable Expenditures
Who the Foundation Cannot Fund: Disqualified Persons
The most important restriction on who a foundation can pay involves “disqualified persons,” meaning people and entities with close ties to the foundation. The IRS broadly prohibits financial transactions between a foundation and its insiders, and the penalties apply even when no one intended to break the rules.
Disqualified persons include:
- Substantial contributors, meaning anyone who gave more than $5,000 to the foundation if that amount exceeds 2 percent of total contributions the foundation has received
- Foundation managers, including officers, directors, and trustees
- Family members: spouses, ancestors, lineal descendants, and spouses of lineal descendants of any substantial contributor or foundation manager
- Corporations, partnerships, or trusts in which the people above hold more than a 35 percent interest
- Certain government officials, including elected officials and high-ranking executive, judicial, and legislative branch employees
Prohibited transactions between the foundation and any disqualified person include selling or exchanging property, leasing property (unless the disqualified person provides it rent-free), lending money, paying unreasonable compensation, and transferring foundation income or assets to an insider.11eCFR. 26 CFR 53.4941(d)-2 – Specific Acts of Self-Dealing Even a bargain sale, where the foundation pays below market value, counts as self-dealing.
The initial excise tax on the disqualified person who participates is 10 percent of the amount involved for each year the violation remains uncorrected. If it is not corrected within the taxable period, the tax jumps to 200 percent. Foundation managers who knowingly participate face an initial tax of 5 percent, capped at $20,000 per act, and an additional 50 percent (also capped at $20,000) if they refuse to agree to the correction.12Office of the Law Revision Counsel. 26 USC 4941 – Taxes on Self-Dealing
Uses That Are Off-Limits
Beyond restrictions on who can receive the money, some uses of foundation funds are barred outright. Section 4945(d) treats spending to influence elections or to lobby for specific legislation as a taxable expenditure, triggering the same 20 percent initial excise tax that applies to other prohibited grants.4Office of the Law Revision Counsel. 26 USC 4945 – Taxes on Taxable Expenditures
The lobbying prohibition covers both direct lobbying (communicating with legislators about specific bills) and grassroots lobbying (urging the public to contact legislators about pending legislation). Foundations can fund nonpartisan research and analysis on policy topics as long as the communication does not directly encourage the audience to act on a specific bill.
Voter registration drives are generally off-limits, with a narrow exception for organizations that meet all of the following: the effort is nonpartisan, it operates in at least five states, it is not confined to a single election period, and the organization receives broad-based support rather than depending on a single donor. Contributions cannot be earmarked for specific states or a single election cycle.13Internal Revenue Service. Influencing Elections and Carrying on Voter Registration Drives
How Grants Count Toward the Annual Payout
Federal law requires every private foundation to distribute a minimum amount each year so it cannot accumulate wealth indefinitely. The floor is 5 percent of the fair market value of all foundation assets not used for charitable purposes, minus any debt incurred to acquire those assets.14Internal Revenue Service. Minimum Investment Return
Which recipients you fund affects whether the payment counts. Grants to public charities count. PRIs count. So does the charitable share of the foundation’s own administrative expenses, such as staff salaries for program officers or travel costs related to grant oversight. Investment management fees do not count.15Internal Revenue Service. Private Foundations – Treatment of Qualifying Distributions IRC 4942(h) Grants to Type III non-functionally integrated supporting organizations do not count either, even though the underlying grant is legal.
A foundation that falls short of the 5 percent payout owes a 30 percent excise tax on the undistributed amount. If the shortfall is not corrected by the end of the taxable period, the penalty climbs to 100 percent of what remains undistributed.16Office of the Law Revision Counsel. 26 USC 4942 – Taxes on Failure to Distribute Income