What is Expenditure Responsibility?

Expenditure responsibility is a five step procedure that is designed to ensure that foundation funds are used for exclusively charitable purposes.

The five basic steps that are required for completing expenditure responsibility include:

Conducting a pre-grant inquiry including a reasonable investigation of the grantee to ensure that the proposed activity is charitable and that the grantee is able to perform the proposed activity.
Executing a written agreement with the grantee that specifies the charitable purposes of the grant and includes provisions that prohibit use of the funds for lobbying activities and require the grantee to return any funds not used for the designated purposes.
Requiring the grantee to maintain the grant funds in a separate fund so that charitable funds are segregated from non-charitable funds.
Requiring the grantee to provide regular reports on the use of the funds and the charitable activity support by the grant.
Including a report on Form 990-PF about the grant including a brief description of the grant, the amount, the charitable purpose and the current status of the grant.

Foundations frequently find that exercising expenditure responsibility is less onerous than it may seem at first glance. Failure to exercise expenditure responsibility when making a grant to a non-charity could result in taxes on the foundation and any foundation manager who knowingly approved the transaction.

Expenditure responsibility for private foundations

For private foundation grantmakers, grants to certain organizations require the foundation to follow a procedure to ensure the grant is not a taxable expenditure for the foundation. Expenditure responsibility is designed to ensure that a grant is used for charitable purposes and that the private foundation maintains appropriate oversight of, and documentation for, the grant.

Expenditure Responsibility Chart for Private Foundations

A tool to help private foundations determine when to use expenditure responsibility for grants to public charities.

Expenditure Responsibility for Community foundations and Other Public Charities

Community foundations and other public charities generally have more flexibility in funding the charitable activities of non-charities, with one exception. Public charities that hold donor-advised funds are required to follow the expenditure responsibility rules that are described above when making certain grants, including those made overseas or to certain supporting organizations.For grants that are not from a donor-advised fund, there are no required steps under IRS regulations, but the public charity grantor may find that adhering closely to the expenditure responsibility rules is a sensible way to ensure that grant funds are used for charitable purposes when making grants to non-charities. Public charities can follow the private foundation expenditure responsibility rules with the exception of the report on the Form 990. Following these steps helps ensure clear documentation of the process the charity used to provide a grant to a non-charity and continued oversight over the grant.