The response to the above question will be determined by the grant’s aspirations and structure. Private foundations are always expected to maintain proper expenditure guidelines, and the guidelines on subject-to-tax expenditures encompass a wide variety of activities.

Once a private foundation contravenes such rules, it may be punished severely. To prevent an infringement, private foundation directors and employees must become acquainted with these guidelines and implement good governance mechanisms.

Private foundations make educational grants to individuals, but the grant should always be crafted on fair, and equitable grounds, according to a mechanism endorsed ahead of time by the IRS, and satisfy a few criteria which include that they are either a scholarship under section 117 of the Internal Revenue Code or an award exempt from income under section 74(b) of the Code.

In order for this sort of award to satisfy the IRS’s requirements, the proposition should have the goal of attaining its objectives, delivering a report, or trying to improve the grantee’s literary, artistic, musical, research-based, instruction, or even other skill or trade.

A taxable expenditure happens if the foundation somehow doesn’t adhere to these guidelines. Private foundations are not permitted to make taxable expenditures. Once they do, substantial penalties are levied which keep going every year until the taxable expenditure is “remedied.”

Prohibited Private Foundation Taxable Expenditures According to the IRS

Private foundation taxable expenditures are IRS-prohibited grants or expenditures. The IRS forbids the following taxable expenditures:

  • Influencing public elections: There are heavy punishments for partaking in an electoral cycle, and doing so might very well result in the foundation’s tax-exempt status being revoked.
  • Non-charitable operations: A grant or dubious institutional spending for non-charitable reasons might very well lead to sanctions for the private foundation.
  • Lobbying: Foundations might attempt to sway national policy, but not by lobbying legislators.

List of IRS-Allowed Private Foundation Taxable Expenditures

The IRS permits the aforementioned grants and spending, but they need to adhere to strict guidelines:

  • Individuals: Foundations should obtain prior IRS authorization before making grants to persons for travel, conducting research, or other similar purposes. Other types of grants, including relief efforts, do not require IRS approval.
  • Non-US organizations: Foundations might very well make grants to non-US groups. They should always, nevertheless, have a moral equivalence commitment that confirms the entity is comparable to a public charity in the United States. Alternatively, the foundation should indeed adopt additional procedures known as expenditure responsibility.
  • Specific supporting organizations (509(a)(3) public charities): When creating grant funding to Type I, II, or III supporting organizations, the foundation should always workout expenditure obligation if foundation top officials or ineligible persons explicitly or implicitly govern the supporting organization (or its supported organization).

Foundations should always do the same with Type III supporting institutions that are not operationally consolidated. The above awards don’t really count toward the charity’s 5% distribution stipulation in any way. Grants to supporting institutions could be treated in the same way as grant money to every other 509(a) (1) or (2) public charity.

  • Organizations in the United States that are not public charities: When it is for humanitarian causes, your foundation may make a donation to an institution that is not a charitable organization. However, you should indeed obey the expenditure responsibility law.
  • Private charitable foundations: The private foundation seeking to make the donation should be fiscally responsible. If you really want the donation to count toward your 5% payout stipulation, the receiving foundation should indeed follow additional rules.
  • Advocating: A private foundation could indeed make awards to impact public policy. Nevertheless, precise guidelines must be followed depending on the type of institution, the intent of the grant, as well as the statements conveyed.

Penalties for Violations by Private Foundations

If a private foundation tries to make a taxable expenditure, it will have to contend with a 20% excise tax on the sum of the taxable expenditure.

Aside from that, any foundation director who consents to make the expenditure sees an excise tax of 5% of the expenditure, up to $10,000 for a single expenditure, except if the activity was rational and not malicious. A foundation director intentionally consented to a taxable expenditure if they did the following:

  • Seemed to have enough factual data to determine that the expenditure was taxable.
  • They were fully cognizant that such an expense could go against the rules controlling taxable expenses.
  • In a discriminatory way, were unable to make rational efforts to ascertain if the action is a taxable expenditure, or was previously informed it is a taxable expenditure.

If the taxable expenditure is not rectified all through the taxable period, extra taxes might be imposed—up to 100% of the taxable expenditure sum to the foundation as well as 50% of the sum, with a peak value of $20,000 for a standard expenditure, to the foundation director.

Have it in mind that the taxable timeframe runs from the date the expenditure took place to the date a notice of deficiency for the preliminary tax is sent out or the tax is evaluated, whichever comes first.

A taxable expenditure is corrected by recouping a portion or the entire amount to the degree that recovery is conceivable. If complete recovery is not feasible, the foundation must consider taking other remedial measures as defined by the situation’s conditions.


As previously stated, private foundations are subject to stringent expenditure rules, and the guidelines on taxable expenditures encompass a wide variety of things. Grants to persons for trips, research, or even other comparable objectives are taxable expenditures except if they are granted objectively and non-discriminatorily in accordance with IRS-approved procedures.