Private Foundations Need IRS Approval for Grants

The latest view on not-for-profit accounting issues

Private foundations are often set up with the purpose of giving out scholarships or grants to individuals. Before starting this program, the IRS requires a private foundation to request “approval” from them. There are certain criteria that must be met with the scholarship/grant program. So, when a private foundation submits a request for approval of their program, they must demonstrate that:

  • Grants or scholarships will be awarded on an objective and non-discriminatory basis. The criteria used in selecting grant recipients should be related to the purpose of the grant. For example, if the foundation is awarding scholarships, consideration should be given to the student’s past academic performance, teacher recommendations, etc.
  • There is a process to reasonably ensure that the amounts given to recipients will have the intended result, which is the activity the grant is intended to finance.
  • The foundation must show that it will have a monitoring and oversight process after the grant is given and after the funds are used, to ensure that funding was used for the intended purpose.

Form 8940 (Request for Miscellaneous Determination) can be filed with the IRS to request this determination. A newly formed private foundation can also complete Schedule H of Form 1023 (application for tax exempt status) to request this advance approval.

By Colette Kamps, CPA