Financial Considerations

Most philanthropies do not provide grants to organizations that do not qualify for 501(c)(3) status from the Internal Revenue Code. 501(c)(3) organizations are exempt from federal taxes and are generally categorized as public charities, private foundations, and private operating foundations. Donations to 501(c)(3) organizations are considered tax-deductible. To obtain 501(c)(3) status, organizations will need to submit an application to the Internal Revenue Service (IRS). More information about this process can be found at Stay Exempt: Tax Basics for Exempt Organizations.

501(c)(3) organizations that have obtained “public charity” status may also need to be thoughtful about how they manage their funding streams. To maintain public charity status, which provides tax advantages and allows donors to deduct their contributions, an organization generally needs to receive at least one third of its revenues from government sources and/or the general public. A large grant from a single private philanthropic partner, known as “tipping,” can upset this balance. Public charities should consult with their accounting and tax advisor(s) when receiving sizable grants to ensure that they are able to maintain their status.