Yes, nonprofits can donate to other nonprofits, and many do it routinely through grants, in-kind gifts, and joint funding. The rule that governs all of it is simple to state and easy to underestimate: every donation has to advance the donor organization’s own exempt purpose. Public charities have a fairly light path when they give to other 501(c)(3)s. Private foundations operate under stricter rules, including a 5% annual payout floor and formal oversight when money goes to any recipient that isn’t a recognized public charity. Getting the mechanics wrong can trigger excise taxes as high as 100% of the grant.
The Mission Rule Comes First
A 501(c)(3) is required to operate exclusively for the charitable, educational, religious, scientific, or literary purposes described in its founding documents.1Internal Revenue Service. Exemption Requirements – 501(c)(3) Organizations A grant to another nonprofit only counts as operating for those purposes if the grant itself advances them.
An environmental conservation group can reasonably fund an organization running reforestation programs. Funding a historical preservation group is harder to defend unless there’s a real connection, like protecting a natural landmark. A grant with no discernible link to the donor’s mission looks like a diversion of charitable assets, and the IRS treats it that way. Persistent mission drift puts tax-exempt status at risk.
The failure point in practice is rarely a bad recipient. It’s the donor’s own paperwork. A board resolution or minutes recording why a specific grant fits the mission, written before the check goes out, is the single most valuable document you can produce if the IRS ever asks.
Rules for Public Charities Giving to Other Nonprofits
If you run a public charity and want to give to another 501(c)(3), the process is short. Confirm the recipient’s exempt status, confirm the grant fits your mission, get board approval, and document it. The IRS Tax Exempt Organization Search lets you verify any organization’s federal status; searching by EIN gives the most reliable result.2Internal Revenue Service. Publication 557, Tax-Exempt Status for Your Organization Charity-to-charity grants face the fewest restrictions in this area.
Things get more complicated in two situations worth flagging even if they don’t apply to you today.
Grants to Foreign Organizations
A public charity funding work overseas has two options. Make an equivalency determination, meaning a good-faith analysis concluding the foreign organization would qualify as a U.S. public charity if it were domestic, based on its governing documents, operations, and funding. Or exercise expenditure responsibility, using the same oversight procedures private foundations follow. Sending money abroad without one of these safeguards puts the charitable character of the grant in real doubt.
Grants Touching Lobbying or Political Activity
A 501(c)(3) cannot earmark a donation for lobbying or campaign activity, even when the recipient is another exempt organization. A general-purpose grant to a 501(c)(4) social welfare group isn’t automatically prohibited, but the donor charity cannot direct the funds toward the recipient’s lobbying work. If the IRS concludes a charity is funneling money to political or lobbying activity, the donor’s own exempt status is on the line.1Internal Revenue Service. Exemption Requirements – 501(c)(3) Organizations
Rules for Private Foundations Giving to Other Nonprofits
Private foundations play by tighter rules. The framework tells you how much you have to give, who you can give to without extra oversight, and what happens when money flows to an organization the IRS doesn’t recognize as a public charity.
The 5% Annual Payout
Every private foundation must distribute at least 5% of the fair market value of its net investment assets each year. These “qualifying distributions” are almost always grants, though certain administrative costs of running a grant program count within limits.3Office of the Law Revision Counsel. 26 USC 4942 – Taxes on Failure to Distribute Income Grants to public charities are the cleanest way to satisfy the requirement. Contributions to organizations controlled by the foundation or by its disqualified persons don’t count toward the 5%, and neither do most contributions to other private nonoperating foundations.4Internal Revenue Service. Qualifying Distributions – In General Missing the 5% floor triggers an excise tax on the undistributed amount.
Expenditure Responsibility for Non-Charity Grants
When a private foundation makes a grant to anything that isn’t a recognized public charity, including 501(c)(4)s, other private foundations, and foreign entities, it has to exercise expenditure responsibility. The IRS uses that term for a specific set of oversight procedures.5Internal Revenue Service. Grants by Private Foundations – Expenditure Responsibility
Three things have to happen. First, a pre-grant inquiry thorough enough to give a reasonable person confidence the grantee will use the funds properly. Second, a written agreement signed by an officer of the recipient, committing to use the funds only for the stated purpose, return any unspent portion, and open the books to the foundation on request. Third, regular reports from the grantee on how the money was spent and what progress was made.6Internal Revenue Service. IRC Section 4945(h) – Expenditure Responsibility
Skip any one of these, and the grant becomes a “taxable expenditure,” which triggers excise taxes on both the foundation and any manager who knowingly approved it.
Self-Dealing and Disqualified Persons
Foundations also have to watch for self-dealing when a grant touches a “disqualified person,” a category that covers substantial contributors, foundation managers, and their families. An indirect act of self-dealing can occur if a foundation grants money to an organization that a disqualified person controls.7Internal Revenue Service. Private Foundations – Indirect Self-Dealing A major donor who sits on the recipient’s board is the classic red flag.
There are exceptions for certain transactions with non-controlled organizations and for pass-through grants used for legitimate charitable purposes. Even so, the default rule is strict and self-dealing excise taxes are among the harshest in the nonprofit code. If a board member or substantial contributor has any tie to a prospective grantee, bring in a tax advisor before approving anything.
Scholarships and Fellowships Through Another Organization
A foundation that wants to fund individual scholarships or fellowships through another organization needs advance IRS approval of its grant-making procedures. The foundation has to show that awards are made on objective, nondiscriminatory criteria and that it will supervise grantees to confirm the grant terms were fulfilled.8Internal Revenue Service. Advance Approval of Grant-Making Procedures The approval covers the foundation’s overall approach, not each individual grant, so a single application can cover several scholarship programs.
In-Kind Donations Between Nonprofits
Not every gift is cash. Equipment, supplies, furniture, and professional services move between nonprofits all the time. The mission-alignment rule applies the same way, but valuation adds complexity. The donor values donated property at fair market value on the date of the gift.9Internal Revenue Service. Determining the Value of Donated Property
Noncash contributions worth more than $500 require Form 8283 with the donor’s return. Items or groups of similar items worth more than $5,000 generally require a qualified appraisal, though inventory is exempt from the appraisal requirement regardless of value.9Internal Revenue Service. Determining the Value of Donated Property The recipient should provide a written acknowledgment describing what was received. Both sides will need it.
What Goes Wrong When the Rules Aren’t Followed
The penalties for a botched inter-nonprofit grant aren’t symbolic. They apply to the organization and, separately, to the individuals who approved the transaction.
When a private foundation makes a taxable expenditure, meaning a grant that should have been subject to expenditure responsibility but wasn’t, the initial excise tax is 20% of the grant amount. If the foundation doesn’t correct the problem within the allowed period, an additional tax of 100% of the grant amount applies.10Office of the Law Revision Counsel. 26 US Code 4945 – Taxes on Taxable Expenditures A $100,000 grant made without proper oversight can generate $120,000 in excise taxes if the situation isn’t fixed.
Foundation managers who knowingly agree to a taxable expenditure face a personal tax of 5% of the amount, capped at $10,000 per transaction. A manager who then refuses to help correct the problem is exposed to a second-tier tax of 50%, capped at $20,000.10Office of the Law Revision Counsel. 26 US Code 4945 – Taxes on Taxable Expenditures The “knowing” standard is doing real work here. A manager relying on professional advice in good faith can avoid the penalty. Willful ignorance doesn’t count as reasonable cause.
For public charities, improper transactions that benefit insiders, including grants structured to benefit a board member or other disqualified person, fall under the excess benefit rules. An organization manager who knowingly participates faces a personal excise tax of 10% of the excess benefit, capped at $20,000 per transaction.11Office of the Law Revision Counsel. 26 US Code 4958 – Taxes on Excess Benefit Transactions
Documentation and 990 Reporting
Every significant grant between organizations should leave a paper trail. Before the money goes out, the board should formally authorize it through a resolution or a recorded vote in the minutes. The record needs to explain how the grant advances the mission with enough specificity that an outsider reading it would understand the connection. For substantial grants, a written grant agreement should set out the purpose of the funds, any use restrictions, and what reporting the recipient owes back.
Public charities that make more than $5,000 in total grants during the tax year report those grants on Schedule I of Form 990. Each domestic recipient that received more than $5,000 in aggregate has to be listed individually with name, EIN, amount, and purpose.12Internal Revenue Service. Instructions for Schedule I (Form 990) Private foundations report every grant on Form 990-PF, with more detailed disclosure that includes the recipient’s status and how expenditure responsibility was satisfied when applicable.13Internal Revenue Service. About Form 990, Return of Organization Exempt from Income Tax Both forms are public. Anyone can look up who received grants from your organization and how much they got.