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Non-Profit Organizations

How to Spend the Money : The Grant Approval Process

By July 20, 2017No Comments

Private foundations create value and accomplish their mission largely through grant giving. Last month we discussed the two schools of thought behind the lifespan of a nonprofit organization and when to make grants. This month, we are looking into how to choose donee organizations and actually provide the grants. Understanding and implementing a grant approval process is pertinent to meeting IRS guidelines and avoiding costly penalties, as well as ensuring that your donated dollars are meeting the organization’s goals.

Grantmaking is the major instrument a private foundation can utilize to achieve its goals. It should be driven by the foundation’s mission and controlled by the board of directors. Specifically, private foundations are required to distribute 5% of their assets annually. It is the Board’s responsibility to consider, select, and successfully make grants which meet IRS requirements and are in line with the private foundation’s exempt purpose. To ensure that these IRS guidelines are met, foundations should create and follow specific procedures to safeguard themselves from potential IRS action.

Determining the size and composition of your grantee pool is essential to any grant-giving organization. Private foundations may choose to provide smaller grants to a large number of charities, or large grants to a select few organizations. They may accept grant applications from all sources, set up an applicant screening process, or personally reach out to organizations they are interested in giving money to. These decisions depend upon the size of the private foundation and how broad or narrow its focus may be. For example, a large foundation with a broad mission statement may choose to openly accept grant applications and approve a variety of different grants. Conversely, a smaller foundation with a narrow focus may want to find charities they feel they can partner with to achieve their mission and reach out to those organizations directly.

After establishing a pool of grant applicants, the board of directors should select which grants to pursue giving. One approach is to fill out a grant questionnaire for each potential grantee with information such as exemption status, amount of grant, conditions to be met, and any conflicts of interest. This uniform format will make it easier to compare options and affirm that all donees are eligible by IRS guidelines. To determine whether a donee is eligible to receive a grant, private foundations must confirm the exempt purpose of the grant. The board must determine the 501(c)(3) status and type of the potential grantee by requesting a copy of their IRS determination letter and verifying the provided information online using the IRS Exempt Organizations Select Check Tool. Acces this tool at https://apps.irs.gov/app/eos/.

If the grant is being made to an organization other than a public charity, there are additional steps which must be followed. Grants made to for-profit organizations, supporting organizations, or another private foundation will require the grantor foundation to exercise expenditure responsibility. This means that adequate procedures are required of the foundation to ensure that the grant money is spent only on the causes it was given to support. The foundation must obtain reports from the grantee on how the funds are spent and report these expenditures to the IRS in order for them to qualify under the exempt purpose of the organization.

Once all selected grants have been deemed eligible and are approved by the board, the board is ready to fund the grant. Along with the payment, the board must provide a grant agreement. At the very least, this agreement should be a letter which confirms the terms of the grant. In cases where the grant is for a large sum of money or more complex conditional requirements exist, a more formal grant agreement is recommended. The grant agreement should specify the amount and purpose of the grant and require that the grantee use the grant consistently with that purpose. It should also require the grantee to return any unused or misused funds and submit written reports detailing how the grant was used. Grant agreements are a vital tool used to convey that your foundation has followed IRS guidelines and subscribed to best practices in making grants.

A well-implemented grant approval process can ensure that your private foundation considers the best possible applicants, meets all IRS guidelines, and makes a real impact on the world in an efficient manner. For further information on how to implement these procedures, contact your L&B professional at 858-558-9200.

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