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I work for a private foundation in Wisconsin – our Board has just redefined its funding priorities to include international grantmaking, and has approved the first contribution to an organization in the United Kingdom to support a dance program for low-income children. The organization is not a recognized 501(c)(3) public charity by the IRS, and has never received a grant from a U.S.-based private foundation. My question is – what happens next?! What documentation is required to correctly make the grant? I’ve seen a lot of information about international grantmaking on the GMN Online Community, but I’m new at this so I want to be very clear – am I about to make a taxable expenditure?
Shaking in Sheboygan
Dear Shaking in Sheboygan,
While I understand your apprehension, the first thing I want you to know is that there are many resources available to walk you through international grantmaking – as well as your fellow GMN members, who in many cases, have been doing this for years! You will just need to focus on developing your own process and set of procedures that fit your organization’s grantmaking needs, and still adhere to IRS regulations.
I’m sure you’ve seen terms like “expenditure responsibility,” and “affidavit of equivalency” tossed around – I’ll define these terms and direct you to some resources that can help you decide which direction to go, and how to do it right.
To quote my good friend at the Council on Foundations (COF) in John A. Edie’s “Expenditure Responsibility Step by Step, 3rd Edition” the definition of expenditure responsibility is “the federally-mandated procedure that a private foundation must follow for any grant made to an organization that is not an IRS-recognized public charity.” The procedure calls for a specific set of steps for documenting, monitoring, and maintaining oversight of the grant funds, with five basic elements: (1) pre-grant inquiry; (2) a written agreement; (3) a separate account to ensure that charitable dollars are not comingled with non-charitable dollars; (4) regular reports from the grantee, and (5) submission of reports to the IRS of how the grant funds were utilized. Following this process will help you ensure that the grant is made in compliance with the IRS rules.
In addition to the COF publication, the GM Guide and resources and discussion threads on the GMN Online Community have examples of forms and templates for each of the steps. The tools will walk you through the due diligence process, grant monitoring, and can help you create internal and external reporting forms or other documents as necessary.
As an alternate to expenditure responsibility, an affidavit of equivalency is a document that helps grantors make an equivalency determination – that is to say that if your foreign grantee was located in the United States, it would meet the IRS criteria for status as a 501(c)(3) public charity. With an affidavit of equivalency in place, you could administer the grant just as you would to a U.S.-based charity. While the due diligence process for an affidavit can be more time-consuming than expenditure responsibility, once the determination is made, the monitoring and reporting can follow your process for U.S. 501(c)(3) organizations. And if your board plans to make multiple grants to this U.K. organization, an affidavit may save you time in the long run as you can rely on it for 12 months.
There are a number of resources to help you formulate your procedures, including previous GMN Conference sessions specifically on equivalency determination. In addition to GMN resources, the United States International Grantmaking (USIG) is a project of COF working in partnership with the International Center for Not-For-Profit Law.
These resources and ideas will help you map this new grant terrain, and hopefully turn your hesitation into confidence and expertise. (All of this said, it’s still important for you to run your newly-developed international grantmaking process by your legal counsel.)
I can see it now – 2011 Conference Session on international grantmaking presented by Wise in Wisconsin!
Dear Grant answers are drawn from the GMN Examiner Editorial Team, supported by experts in the field .
The GMN Examiner Editorial Team
The GMN Examiner is published three times a year through the dedicated efforts of GMN members and volunteers.
Ericka Novotny – Editor
Allison Gister – Associate Editor