Generally, 501(c)(3) organizations can make grants to individuals and to businesses if such grants are made in furtherance of their 501(c)(3) tax-exempt purposes and are not expended in a manner inconsistent with 501(c)(3). In Part One of this series, we focused on mission-consistency, charitable class, and prohibited private benefits. In Part Two, we looked more specifically at a public charity’s provision of grants to individuals for disaster relief and emergency hardships. In this Part Three, we place our attention on a public charity’s provision of grants to businesses for disaster relief and emergency hardships.
Criteria and Process
Generally, a public charity can provide grants to businesses for disaster relief and emergency hardship if:
- the assistance is a reasonable way of furthering the charity’s charitable purpose, and
- any benefit to the business or its owners is incidental, quantitatively and qualitatively, to the furthering such charitable purpose.
A relevant charitable purpose for such assistance might be to relieve poverty and distress if the business owners themselves are financially needy or otherwise members of a charitable class. Additionally, grants to businesses may also be appropriate if the charity’s mission is to combat community deterioration or lessen the burdens of government. These purposes are discussed further in our post on Economic Development as a 501(c)(3) Activity.
Any private benefit to the grantee business and/or its owners may be considered incidental if the charity determines, after reasonable investigation, that the business did not have adequate resources from its own assets, conventional financing, or insurance to recover from the disaster or emergency hardship. According to this IRS webpage: “Moreover, a charity would need to determine that without its intervention the business would not locate or remain in the area.”
As is the case with grants made to individuals, before a charity makes grants to businesses, it should:
- determine that such assistance is a reasonable way of furthering the charity’s charitable purpose;
- base its selection of grantees on an objective determination of need (best evidenced by appropriate written criteria);
- determine the criteria for when to discontinue assistance to a particular grantee (generally, once the business becomes self-supporting), if the charity allows a grantee to receive ongoing assistance (subsequent grants);
- use either an independent selection committee or substitute procedures adequate to ensure that any benefit to the grantee is incidental;
- set forth conditions on the use of the grant (pursuant to a grant agreement) to ensure the charity’s funds must be used as intended and not supporting impermissible activities like electioneering; and
- determine what records it will document (which will inform any reporting requirements for the grantee) and maintain.
Generally, the following documentation should be maintained in connection with disaster relief grants to businesses:
- a complete description of the assistance,
- cost of the assistance,
- the purpose for which the assistance was given,
- the charity’s objective criteria for disbursing assistance under each program,
- how the recipients were selected,
- the name, address, and amount distributed to each recipient,
- any relationship between the recipient and officers, directors, or key employees of or substantial contributors to the charity, and
- the composition of the selection committee or other authorized body approving assistance.
In Part Four of this series, we will focus on a private foundation’s provision of grants to individuals and businesses for disaster relief and emergency hardships.