Posted on Wednesday, November 05, 2014

Two key requirements of being exempt under Section 501(c)(3) of the IRS Code is that the nonprofit is organized and operated for a charitable (educational, scientific, religious) purpose and that no part of its net earnings benefit any private shareholder or individual.  When organizations give out grants or scholarships, there are specific rules that need to be followed so that the organization continues to maintain its exempt status.

Scholarships to individuals are not prohibited, as long as they are made to further the organization’s charitable purpose.  Scholarships are only considered charitable if there is a charitable class of potential recipients.  Potential recipients must make up a group large enough, or an indefinite group, so that assistance to the members of the class ultimately benefits the greater community. 

Scholarships to attend schools promote education, a charitable purpose, so long as the school has a regularly scheduled curriculum, a regular faculty, and an enrolled body of students in attendance. 

The IRS has specific rules for awarding scholarships by private foundations that should also be used as a guide for public charities.  In addition to other requirements, the grant procedures must be objective and nondiscriminatory.  Specifically the person or group of people (donor, board, scholarship committee, etc.) who select scholarship recipients should not be in a position to receive a private benefit, either directly or indirectly, if certain recipients are selected over others.  Therefore scholarships should not be awarded to board members or their families.  In addition, donors may not earmark their contributions as scholarships for specific named individuals as this would fail the nondiscriminatory test. 

In order to make sure your organization is meeting the requirements of giving scholarships and preventing any personal benefit, you may want to consider a written scholarship policy including the following.

- A statement that the scholarship is given on an objective and nondiscriminatory basis.

- A description of the intended use of the scholarship.

- Eligibility requirements to receive the scholarship.

- The criteria used to determine how the scholarship is awarded.

- The individual(s) approving the scholarship.

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

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