What is expenditure responsibility and when do we have to use it?
Expenditure responsibility is a set of procedures allowing private foundations to make grants to nearly any entity, as long as the grant is for charitable purposes and follows all other legal guidelines (i.e. no self-dealing, lobbying, etc.). The following procedures are necessary to comply with the expenditure responsibility rules:
Take reasonable steps to investigate a potential grantee’s capability of, and commitment to, executing the charitable activity.
Written grant agreement
This agreement should outline the terms and plans for the intended charitable activity and describe the grant’s limitations (such as prohibiting political activities). Check with legal counsel for these limitations.
Grantee reports and grantor recordkeeping
The grantee must provide regular reports of the grant’s financial status, and the progress of achieving the intended charitable purposes. The grantor must keep these on file.
Reporting the grant to the IRS on Form 990-PF
Expenditure responsibility grants must be reported in the year they are made, and in each year in which they are outstanding. A statement must include grant recipient information, the grant amount, purpose, description and its current status.
Grantees, except for private foundations, are required to set up a separate account for the grant funds, to prevent the commingling of charitable and non-charitable funds.
|U.S. 509(a)(1) & (a)(2) public charities||No||The charity must be a 501(c)(3) and must be classified under Section 509(a)(1) or (2) or Section 4940(d)(2).|
|U.S. supporting organizations (509(a)(3) public charities)||Sometimes||If the supporting organization has any disqualified persons directly or indirectly controlling either the supporting or supported organizations, expenditure responsibility is required. Also, Type III supporting organizations if not “functionally integrated” all require expenditure responsibility. Grants to supporting organizations in all other circumstances do not require expenditure responsibility.|
|U.S. governmental agencies||No||This includes entities such as school boards, fire departments, public libraries, etc.|
|U.S. or foreign organizations that are not public charities or government agencies||Yes||Private foundations are included here and have additional requirements for both the grantor and grantee foundation.|
|Foreign public charities||Sometimes||Expenditure responsibility is only required if you have not made an equivalency determination.|
The chart above outlines types of organizations. However, it should be noted that expenditure responsibility cannot be done as a means of working around IRS prior approval requirements for making grants to individuals.