May our 501(c)(3) charity make grants to struggling groups doing work that we support during the coronavirus pandemic if the groups don’t have a recognition of exemption from the IRS? They may have to fold if they don’t get help quickly.
The short answer is “yes,” you may fund groups that are not recognized charities so long as the grants are for charitable purposes. The issue is what you have to do to make such grants. The rules are different for public charities and private foundations.
A 501(c)(3) public charity may make grants to non-charitable organizations so long as the grant is for charitable purposes. One of principal methods of fiscal sponsorship involves public charities soliciting deductible charitable contributions to fund a specific charitable program and then granting those funds to an unrecognized organization to carry out the program. Often this is used for a start-up group that has filed for, but has not yet received, its recognition of exemption from the IRS. But it is also used for individual film makers and other groups that have no intention of filing for charity status. A public charity should follow its normal grant-making procedures, assuring that the work being done is actually charitable, getting an appropriate letter of request, and requiring follow-up reports.
A 501(c)(3) private foundation (or a donor advised fund at a public charity) may also make a grant to an unrecognized group for charitable purposes, but only if it exercises “expenditure responsibility.” (See Ready Reference Page: “Outflanking Foundations’ Public Charity Defense”) The procedure requires sometimes enhanced inquiry about the grantee, a written agreement, full annual reports, and a commitment by the grantee not to use the money for lobbying activities. An expenditure responsibility grant of a private foundation must also be reported separately on the foundation’s annual Form 990-PF. The requirements are not so onerous that there is huge risk, but many private foundations fail to make such grants because there is a potential for personal liability on managers who fail to comply with all the rules. To avoid expenditure responsibility, private foundations and donor advised funds wanting to support these organizations could make their grants to a public charity that is making emergency grants to these organizations. Many community foundations are establishing such emergency funds in the current climate.