Grants to Worker Cooperatives & Small Businesses
From the President’s Blog
Eddie Torres
As Grantmakers in the Arts increasingly shares information on supporting solidarity economies, we are asked,
“Can I make a grant to a worker cooperative – or any other part of the solidarity economy – if it’s a private business?” The answer is yes – you can support private businesses through grants.
The due-diligence process for a foundation to support a business – through grants or program-related investments for a charitable purpose – is called expenditure responsibility, as articulated in the Section 4945(h) of the Internal Revenue Code (IRC). This expenditure responsibility process includes paperwork and administrative oversight, like most foundations' regular operations. “Won’t this create an administrative burden on the part of the business?” Not if you take on most of the work, making it as easy as possible for the business. Get your procedures in place and carefully design your documents toward that end.
The Internal Revenue Service does stipulate some differences in how your expenditure responsibility grantees are able to use your funds, different from a typical grant. The charitable purpose stipulation discourages giving general operating support to a business. However, if the charitable purpose of your expenditure responsibility grant is core to the business, this can allow for project support to include the expense of overhead. The tax code prohibits businesses from lobbying with grant funds, but they can still lobby otherwise. Your typical nonprofit grantees can legally lobby using your grant funds, as long as it is not the only way they plan to use them.
Who needs to use the expenditure responsibility process? Private foundations and charities that hold donor-advised funds (DAFs), such as community foundations. Nonprofits making regrants can devise their own procedures, though many use expenditure responsibility as a guideline.
Expenditure responsibility has 5 steps:
Pre-grant inquiry
Document your evidence that the business is capable of the charitable purpose to be funded, including the business’ mission, history, business practices, management team.
These can include your experiences with the business.
This only needs to be done once and is kept as a file you periodically update.
Written agreement requiring grantees
Specify the charitable purpose to be achieved with the funds.
Keep the grant funds in a separate account.
Repay any portion of the grant not used for a charitable purpose.
Submit an annual report on the grant’s use.
Maintain financial records.
Commit to not lobbying, voter-registration, or electioneering.
Separate account
This one is atypical. Charitable dollars given to a business cannot be commingled with noncharitable dollars. The business must keep grants in a separate account. This can be a separate bank account, or just a separate bookkeeping account.
Regular reports
Regular reports on the expenditure of the grant for charitable purposes. At the end of the grantee’s annual accounting period until the grant funds are spent, including a final report.
Report to the IRS on the tax return.
When filling in the Form 990-PF information return for any year in which an expenditure responsibility grant is made, a private foundation must indicate that they have made such a grant and add a schedule to the form. The schedule must contain a brief description of each grant including:
The business’ name and address
The date and amount of grant
The charitable purpose
Amounts expended by the business based on their most recent report
Whether the business has diverted any funds from the charitable purpose
Dates of grantee reports received
Date and result of any verification of the business’ report (only required if you have any reason to doubt the business’ veracity)
“The tax code states clearly that if the foundation has made documented effort to see that the grant is used for a charitable purpose, there is no liability on the part of the foundation, even if the business “misuses” the grant. ”
Documentation on expenditure responsibility can be found at Expenditure Responsibility Step by Step by Council on Foundations. This book chapter also contains sample form templates. It is a free download for Council on Foundations members and requires payment from non-members.
You can also find the Internal Revenue Service’s exact language in Section 4945(h) of the Internal Revenue Code (IRC). As a warning – this section is written in language meant to frighten you into doing your due diligence. Don’t let it scare you away from doing what you want to do.
“Then why does my lawyer say we cannot grant to businesses?” If you’re a government agency, investigate the source of prohibiting rules. They may be state or local law – all of which can change with legislative action, or rules that the agency can change.
If you’re a foundation, you may have rules in place. If those rules are in your bylaws, changing them will require appetite and energy on the part of your board of directors. If those are just management rules, the President of the foundation can change them, being transparent with the board that they’re doing so.
Rules and requirements need not inhibit us. We can learn about rules and regulations and work to change them without abandoning our ambitions. Our grantmaking our future is worth it.
ABOUT THE AUTHOR
Eddie Torres is President & CEO of Grantmakers in the Arts.
