Expenditure Responsibility: Granting Outside the 501(c)(3) Universe

Most foundation grants go to American public charities, where the compliance question is simple: confirm the organization is a qualified 501(c)(3) in good standing, and you are largely done.

Then someone proposes funding a community organization in Kenya, a benefit corporation building an affordable housing product, a coalition that never incorporated, or a research project housed inside a company. Each is a legitimate charitable target. None is a US public charity. And the reflexive institutional answer — "we can't fund that" — is wrong.

Private foundations can fund almost any entity for charitable purposes. What the law requires is that they exercise expenditure responsibility: a defined procedure under IRC §4945(h) that substitutes foundation oversight for the IRS's usual reliance on the grantee's own charitable status. It is real work, but it is a known process with known steps, not a legal grey area.

This guide sets out when it applies, the five steps, and where foundations get it wrong.

What a taxable expenditure is, and why this matters

IRC §4945 defines certain foundation payments as taxable expenditures, which trigger excise taxes on the foundation and, potentially, on the managers who approved them. Among them: grants to organizations that are not public charities, unless the foundation exercises expenditure responsibility.

So this is not a best-practice framework. It is the mechanism that keeps an otherwise-penalized grant lawful. Get it right and the grant is fine — and counts as a qualifying distribution toward your 5% requirement. Get it wrong and you have a taxable expenditure to correct and report.

The rules exist for an intelligible reason. When you fund a public charity, the IRS already supervises the recipient. When you fund a Kenyan NGO or a Delaware LLC, it does not — so the foundation takes on the supervisory role instead.

When you need it

Expenditure responsibility is generally required for grants to:

• Foreign organizations without a US determination letter — unless you use equivalency determination instead (below)
• For-profit entities — LLCs, C-corps, benefit corporations — for charitable projects
• Other private foundations, including non-operating ones
• Type III non-functionally-integrated supporting organizations, and certain other supporting organizations
• Organizations whose exemption has been revoked
• Unincorporated groups without their own exempt status and without a fiscal sponsor

You generally do not need it for grants to US public charities in good standing, to private operating foundations in defined circumstances, or where a fiscal sponsor that is itself a public charity receives the grant and takes responsibility for the project.

That last route is the most common practical workaround: if the project sits under a public charity fiscal sponsor, you are making a grant to the sponsor, and ordinary rules apply. See the fiscal sponsorship note below.

The five steps

1. Pre-grant inquiry

Before any money moves, conduct a reasonable inquiry into the grantee: who runs it, what it has done, whether it is capable of performing the proposed work, and whether the funds are likely to be used as intended.

The depth should be proportionate to the size, complexity and risk of the grant. A $10,000 grant to a small organization with a track record needs less than a $2m grant to a newly formed foreign entity. Document what you looked at — the file is the evidence that the inquiry happened.

2. A written grant agreement with mandatory terms

This is the step most often done badly, because foundations use their standard agreement and it lacks the required provisions. The agreement must commit the grantee to:

1. Use the funds only for the purposes specified in the agreement
2. Repay any funds not used for those purposes
3. Submit reports on how funds were spent and progress toward the purposes
4. Maintain records of receipts and expenditures, and make its books available to the foundation for inspection
5. Refrain from prohibited activities — no lobbying, no electioneering, no grants to individuals or organizations that would themselves fail these rules

All five must be present. A generic grant agreement almost never contains items 2, 4 and 5.

3. Restrict the grant to a specific charitable project

Where the grantee conducts both charitable and non-charitable activities — which is true of essentially every for-profit — the grant must be for specific charitable projects, programs or activities, not general or unrestricted operating support.

This is a genuine constraint with a real cost. General operating support is widely recognized as more useful to recipients than project funding, so for-profit and mixed-purpose grantees structurally cannot receive the most useful form of money. There is no way around it: the requirement is what prevents charitable dollars subsidizing commercial activity.

The grantee must also hold the funds in a separate account dedicated to the charitable purpose, so charitable and other money do not commingle.

4. Obtain grantee reports

The grantee must report at least annually on how the funds were spent and what progress was made, until the full amount is expended or returned. A final report is required when the grant is fully spent.

If reports do not arrive, the foundation must withhold further payments and take reasonable steps to obtain them. Silently continuing to pay is the failure mode that turns a paperwork problem into a compliance problem.

5. Report to the IRS

The foundation reports each expenditure responsibility grant on its Form 990-PF — in the year it is made and in every subsequent year until the funds are fully expended. This is a live, multi-year obligation, and it is where foundations most often fall out of compliance: the grant is made carefully in year one, and the year-three reporting is forgotten.

Foreign grants: the two routes

For international grantmaking, foundations choose between two approaches, and the choice has real consequences.

Equivalency determination requires a good-faith determination — usually via written counsel or a qualified practitioner's opinion based on a detailed affidavit from the grantee — that the foreign organization would qualify as a US public charity if it were American. It is more work upfront but permits general operating support, which expenditure responsibility does not.

Shared repositories exist to spread the cost of equivalency determinations across multiple funders, which makes the economics far better for organizations that receive money from several US foundations.

There are also separate obligations that apply regardless of route: anti-terrorism screening against the OFAC Specially Designated Nationals list, and sanctions compliance. These are not part of §4945 but sit alongside it.

Fiscal sponsorship: the route around the problem

If the charitable project can sit under a US public charity fiscal sponsor, the foundation makes a grant to that sponsor and ordinary public-charity rules apply. No expenditure responsibility, no separate account, no multi-year 990-PF reporting.

Two cautions. First, the sponsor must have genuine discretion and control over the funds — a pass-through arrangement where the sponsor is a conduit does not work and can put both parties at risk. Second, sponsors charge an administrative fee, commonly a percentage of the grant, which the foundation is effectively paying.

For most foundations funding small unincorporated projects, fiscal sponsorship is cheaper and simpler than expenditure responsibility. For funding a for-profit or a substantial foreign NGO, it usually is not available.

Grants to individuals: a separate regime

Expenditure responsibility covers grants to organizations. Grants to individuals — scholarships, fellowships, prizes, hardship payments — sit under a different part of §4945 and are worth separating out, because foundations routinely conflate the two.

A grant to an individual for travel, study, or similar purposes is a taxable expenditure unless the foundation obtains advance approval of its grantmaking procedures from the IRS. Advance approval, not after-the-fact justification. The procedures must show that:

• The selection process is objective and non-discriminatory
• The group from which recipients are selected is broad enough to constitute a charitable class
• Selection is not controlled by disqualified persons
• The foundation supervises the grants and follows up on their use

Some individual grants fall outside the requirement — notably prizes and awards where the recipient is selected from the general public without having applied, and the award is not conditioned on future activity.

The practical consequences are worth stating plainly. A foundation cannot decide in November to help a specific family in need and treat it as a grant; that is not a charitable class. A scholarship program cannot select on the founder's personal recommendation. And the approval process takes time, so a foundation planning to launch a scholarship program in the next cycle needs to start well before the cycle.

Where advance approval is not practical, the standard workaround is to grant to a public charity that runs the individual-grant program itself — a community foundation, a scholarship intermediary, or the institution the student attends.

Where foundations get this wrong

Five recurring failures, in rough order of frequency:

Using the standard grant agreement. It almost never contains the repayment, records-access and prohibited-activities provisions. This is the single most common defect and the easiest to fix.

Forgetting the multi-year reporting. The grant is reported in year one and then drops off the 990-PF while funds remain unspent.

Treating the pre-grant inquiry as a formality. An undocumented inquiry is, for evidentiary purposes, no inquiry.

Making a general support grant to a mixed-purpose entity. Usually because the grant was structured before anyone checked the grantee's status.

Continuing to pay after reports stop. Tranches release on schedule because nobody connected the payment schedule to report receipt.

Every one of these is an operational failure rather than a legal misunderstanding — which is why this is a systems problem more than an advice problem.

Where software fits

Expenditure responsibility is a workflow with dependencies: a documented inquiry before approval, specific clauses in the agreement, tranches gated on reports, and a reporting obligation that persists for years after the decision. Managed on a spreadsheet, the year-three obligation is the one that disappears.

Tools like Plinth hold the grant record, conditions, payment schedule and grantee reporting together, so a payment can be gated on an outstanding report rather than released by a calendar. Due diligence captures the pre-grant inquiry against the grant record, and applications can flag grantee type at intake so a non-public-charity applicant is identified before the agreement is drafted rather than after.

None of this is legal advice, and expenditure responsibility is an area where counsel earns its fee. What software changes is whether the process you agreed with counsel actually gets followed in year three.

Building it into the grant cycle

Expenditure responsibility fails operationally rather than legally, so the fix is operational too. Four points in the cycle where it should be designed in:

At intake. Ask every applicant what type of entity they are, and validate it. If the answer is anything other than "US public charity in good standing," route the application down a different path immediately. Discovering the grantee is a foreign NGO after the agreement has been drafted is how the wrong template gets used.

At approval. The board or committee paper should state explicitly that expenditure responsibility applies and that the pre-grant inquiry has been completed. This puts the obligation on the record at the moment of decision, where it is auditable.

At payment. Tranches should be gated on receipt of the required reports, not on dates. This is the single highest-value control, because it converts a monitoring obligation into something that physically cannot be skipped.

At year end. Every live expenditure responsibility grant needs to appear on that year's Form 990-PF. The list should be generated from the grant records rather than assembled from memory, and it should include grants approved in earlier years that still have unspent funds.

The last one deserves emphasis because it is the most common failure and the least visible. A grant made three years ago, still partly unspent, sitting on nobody's list, is a reporting gap that nothing in the normal cycle will surface.

Frequently asked questions

What is expenditure responsibility in plain terms?

A defined procedure that lets a private foundation grant to an organization that is not a US public charity without the payment becoming a taxable expenditure. The foundation substitutes its own oversight for the IRS's supervision of the grantee.

Can a private foundation fund a for-profit company?

Yes, for a specific charitable project, with expenditure responsibility exercised and the funds held in a separate account. It cannot be general operating support.

Do we need expenditure responsibility for foreign grants?

Either that or an equivalency determination. Expenditure responsibility is better for one-off project grants; equivalency determination costs more upfront but permits general support and lasts across repeat grants.

Does an expenditure responsibility grant count toward our 5% payout?

Yes. Properly conducted, it is a qualifying distribution like any other grant.

How long do we have to report the grant to the IRS?

On the Form 990-PF for the year the grant is made and every subsequent year until the funds are fully expended or returned.

What if the grantee stops sending reports?

Withhold further payments and take reasonable steps to obtain the outstanding reports. Continuing to pay while reports are missing is the behavior most likely to create a compliance problem.

Is fiscal sponsorship simpler?

Usually, where it is available. A grant to a public charity fiscal sponsor follows ordinary rules — but the sponsor must have genuine discretion and control, and will charge an administrative fee.

Do public charities need expenditure responsibility?

No. It is a private foundation requirement under Chapter 42. Public charity grantmakers, including community foundations, operate under different and generally lighter rules.

Recommended next pages

• Private Foundation vs Public Charity — why these rules apply only to foundations
• Verifying 501(c)(3) Status Before You Grant — establishing whether you need this at all
• The 5% Payout Rule Explained — how these grants count
• How to Automate Due Diligence — the pre-grant inquiry at scale
• Audit Trails in Grant Software — evidencing the process years later

Last updated: August 2026