Can private foundations provide grants to foreign charities?
Yes, private foundations can provide grants to foreign charities, and there are several ways to do so. One straightforward approach is to partner with U.S.-based 501(c)(3) public charities that operate programs internationally. For example, well-known organizations like the American Red Cross often set up disaster relief funds for countries affected by natural disasters, such as earthquakes. Although the funds are ultimately used abroad, the crucial point is that the grant’s legal recipient is a 501(c)(3) public charity recognized by the IRS.
Another option involves foreign nonprofits that establish a "US Friends of" entity, which is an affiliate organization registered in the United States with 501(c)(3) status. Because this process involves extensive paperwork and legal requirements, it is generally more suitable for larger foreign charities. These "US Friends of" entities can be created for a wide range of organizations, including religious institutions, universities, museums, and theaters. For instance, Friends of Notre-Dame de Paris is a 501(c)(3) charity in the United States that leads fundraising efforts to rebuild and restore the Notre-Dame Cathedral after the devastating fire in 2019. Private foundations can make grants to these "US Friends of" organizations because they are recognized as 501(c)(3) public charities.
What if a foundation wants to support an international cause that does not have a 501(c)(3) organization in the United States? For instance, suppose a foundation wishes to assist an orphanage in Haiti that isn’t officially recognized in the U.S. Is this kind of grant-making still possible? Yes, it is. Private foundations can indeed make grants to international charities without an IRS-recognized intermediary, but the process is more complex than simply writing a check.
To make grants to organizations not recognized by the IRS, private foundations typically use one of two methods: equivalency determination or expenditure responsibility.
What is equivalency determination for private foundations?
Equivalency determination involves the foundation making a good-faith determination that the foreign organization is similar and equivalent to a U.S. public charity. Essentially, it demonstrates that the foreign organization would qualify as a 501(c)(3) if it was located in the U.S. This determination must be made by a qualified tax practitioner as an official piece of written advice, typically valid for two years before requiring refreshing and re-verification. While this method entails additional effort, it remains a viable option for grants of sufficient magnitude.
Equivalency determination involves the foundation making a good-faith assessment that the foreign organization is similar to a U.S. public charity. This requires the foundation to gather detailed information about the foreign organization's structure, governance, finances, and activities to ensure it would meet the criteria for 501(c)(3) status if it were in the United States. A qualified tax practitioner must prepare an official written opinion verifying this equivalency, which is typically valid for two years before needing renewal. While equivalency determination may be costly and time-consuming, it can be efficient for ongoing partnerships with established organizations. It is especially useful when the foundation plans to make repeated or substantial grants to the same foreign entity.
What is expenditure responsibility for private foundations?
Expenditure responsibility requires the foundation to implement and maintain procedures to ensure that the grant is used solely for its intended charitable purpose. This process starts with thorough due diligence, including verifying the foreign charity’s identity, leadership, and activities to assess the likelihood that funds will be used appropriately. The foundation must then secure a written agreement from the foreign organization, outlining the grant’s specific purpose and ensuring compliance. Once the grant is awarded, the foundation must monitor how the funds are spent, requiring the foreign charity to provide detailed and timely reports. These reports must include a breakdown of expenditures and evidence that the funds were used in line with the charitable mission. The foundation must keep detailed records and submit summaries of these expenditures to the IRS. Though this method demands ongoing oversight and meticulous documentation, it provides a flexible way to support a wide range of international causes, especially for one-time or smaller grants.
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