A 501(c)(3) can give money to individuals, other nonprofits, for-profit companies, foreign organizations, and its own employees and contractors. What the IRS cares about is not so much the identity of the recipient as the reason for the payment: every dollar must advance the charitable, religious, educational, scientific, or similar purpose the organization was recognized for.1Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc The rules then bend depending on who is on the receiving end and whether the paying organization is a public charity or a private foundation.
Two limits run underneath everything else. None of the organization’s earnings can benefit insiders like board members, officers, or key employees beyond reasonable compensation for their work.2Internal Revenue Service. Exemption Requirements – 501(c)(3) Organizations And substantial private benefit flowing to anyone outside the charitable class, even a non-insider, can put exemption at risk, though incidental benefit that comes along with genuine charitable work is tolerated.3Internal Revenue Service. Overview of Inurement/Private Benefit Issues in IRC 501(c)(3) Keep those two rails in mind and the recipient-specific rules below make more sense.
Individuals
Payments to individuals are permitted and common. They are also the type of distribution the IRS scrutinizes most closely, because the risk of favoritism is highest. The consistent thread is that recipients have to be chosen on charitable need or objective merit, not personal connection.
Scholarships, Fellowships, and Prizes
A 501(c)(3) can fund scholarships, fellowships, and grants for study, travel, or creative work. Private foundations have to clear an extra hurdle: they must get IRS approval of their grant procedures in advance, showing that selection is objective and nondiscriminatory, that the grants are likely to accomplish the intended purpose, and that the foundation will collect reports on how recipients use the funds.4eCFR. 26 CFR 53.4945-4 – Grants to Individuals Without that approval, the grant becomes a “taxable expenditure” and triggers penalty taxes on the foundation.
Achievement awards and prizes work on the same logic. The recipient must be selected from the public using objective criteria that tie back to the organization’s mission.5Internal Revenue Service. Grants to Individuals A vaguely defined prize that lands with a board member’s relative is exactly the kind of thing that costs organizations their status.
Disaster Relief and Hardship Assistance
Direct financial help to people facing emergencies, medical crises, or other hardships is squarely within the mission of many charities. The requirement is that recipients belong to a “charitable class,” meaning the group of potential beneficiaries is either large enough or indefinite enough that the community as a whole benefits, not a handful of identified individuals.6Internal Revenue Service. Disaster Relief – Meaning of Charitable Class
“All residents of the county affected by the flood” easily qualifies. A program limited to employees of a single company works only if it also covers employees affected by future disasters, so the total pool cannot be counted in advance. A relief fund built around one specific event, for one identifiable group, with no plan to continue, fails the test.6Internal Revenue Service. Disaster Relief – Meaning of Charitable Class
Every individual payment should be needs-based and documented. Assess each recipient’s situation, record how the amount was determined, and confirm the money went where it was meant to go.
Other 501(c)(3) Organizations
Grants from one public charity to another are the cleanest kind of distribution, but you still verify status before writing the check. The IRS runs a free Tax Exempt Organization Search that shows whether a group is eligible to receive tax-deductible contributions, whether its status has been automatically revoked, and its recent Form 990 filings.7Internal Revenue Service. Search for Tax Exempt Organizations
This is worth the two minutes. If a grantee lost its status for failing to file returns three years in a row, your grant may not qualify. A written grant agreement stating how the money will be spent, together with a reporting requirement, protects both sides and gives you something to point to if the funds go sideways.
For-Profit Companies and Non-Exempt Nonprofits
A 501(c)(3) can pay a for-profit company. Nonprofits do it constantly: hiring a construction firm to build affordable housing, paying a caterer for a fundraising event, buying software, contracting with consultants. These are ordinary operating expenses. The organization should pay fair market value and be able to explain why the expenditure serves the mission.
Private foundations run into a stricter rule when they make grants (rather than pay for goods and services) to anything that isn’t a public charity. Under federal tax law, that grant is a taxable expenditure unless the foundation exercises “expenditure responsibility.”8Office of the Law Revision Counsel. 26 US Code 4945 – Taxes on Taxable Expenditures Expenditure responsibility means five things:
- A pre-grant inquiry into whether the recipient can properly use the funds for charitable purposes.
- A written grant agreement spelling out how the money must be spent.
- Separate accounting by the recipient, so grant funds are not mixed with other money.
- Regular reports from the recipient on how the funds are being used.
- Reporting on Form 990-PF that expenditure responsibility requirements were met.
Skipping these steps triggers a 20% excise tax on the foundation and a 5% tax on any manager who knowingly approved the grant. If it isn’t corrected, those jump to 100% of the grant for the foundation and 50% for the manager.8Office of the Law Revision Counsel. 26 US Code 4945 – Taxes on Taxable Expenditures Public charities don’t face those specific penalty taxes, but every grant they make to a non-exempt entity still has to genuinely serve a charitable purpose.
Foreign Organizations
Money can go overseas. The path depends on the foreign recipient’s status. If the foreign organization already holds an IRS determination letter recognizing it as a 501(c)(3) public charity, the grant works like a domestic one. If it doesn’t, a private foundation has two ways to proceed.
The first is an equivalency determination: a written opinion from a qualified tax practitioner concluding that the foreign organization would qualify as a U.S. public charity. That determination is generally valid for two consecutive tax periods. The second is expenditure responsibility, the same five-step process used for domestic non-charitable grantees. Without one of the two, the foreign grant is a taxable expenditure and triggers the same excise taxes as any other taxable expenditure.9Internal Revenue Service. Grants to Foreign Organizations by Private Foundations
Public charities making foreign grants aren’t formally bound by the expenditure responsibility framework, but they should still do reasonable due diligence and keep documentation showing the funds served charitable purposes.
Employees, Officers, and Contractors
Salaries, benefits, consulting fees, and contractor payments are all legitimate. The IRS expects a nonprofit to pay the people who run its programs. What it requires is reasonable compensation: the amount similar organizations pay for similar work under similar circumstances.10Internal Revenue Service. Meaning of Reasonable Compensation
To make that finding hold up under scrutiny, boards use the rebuttable presumption procedure before approving pay for officers and key employees. Three steps: approval by board members without a conflict of interest, comparable salary data gathered before the decision, and contemporaneous documentation of the basis for the amount.11Internal Revenue Service. Rebuttable Presumption – Intermediate Sanctions Follow all three and the IRS has to prove the compensation is unreasonable. Skip them and the burden runs the other way.
When an insider is paid more than the services are worth, the excess is an “excess benefit transaction.” The recipient owes a 25% excise tax on the overpayment, and 200% if it isn’t returned within the correction period.12Office of the Law Revision Counsel. 26 US Code 4958 – Taxes on Excess Benefit Transactions The tax falls on the individual, though board members who approved the deal can face penalties too, and the IRS can revoke exempt status in serious or repeated cases.13Internal Revenue Service. How to Lose Your 501(c)(3) Tax-Exempt Status (Without Really Trying)
Private foundations play by tighter rules. Certain transactions between the foundation and “disqualified persons” (substantial contributors, foundation managers, and their family members) are prohibited outright, even at fair market value: selling or leasing property, lending money, and transferring foundation income or assets to insiders. The narrow exception is reasonable compensation for personal services that are necessary to carry out the foundation’s exempt purpose.14Office of the Law Revision Counsel. 26 US Code 4941 – Taxes on Self-Dealing
What Is Off-Limits
Some payments are prohibited regardless of the recipient. Political campaign activity is the clearest line. A 501(c)(3) cannot spend any money supporting or opposing a candidate for public office, whether through direct contributions, endorsements, or other campaign intervention.15Internal Revenue Service. Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations There is no threshold. A single contribution can cost the organization its status. Nonpartisan voter education, registration drives, and public forums remain fine as long as they don’t favor a candidate.
Lobbying is not banned, but it is capped. The statute prohibits devoting a “substantial part” of activities to influencing legislation, measured by facts and circumstances covering both time and money.16Internal Revenue Service. Measuring Lobbying – Substantial Part Test Most public charities (other than churches and private foundations) can elect the 501(h) test to swap the vague standard for a specific dollar cap tied to exempt-purpose spending, up to a $1 million ceiling.17Internal Revenue Service. Measuring Lobbying Activity – Expenditure Test
And the private inurement and private benefit prohibitions run through every category above. Any payment that primarily benefits an insider, or that channels substantial benefit to individuals outside the charitable class, is off-limits no matter how it is labeled on the books.3Internal Revenue Service. Overview of Inurement/Private Benefit Issues in IRC 501(c)(3)
Documenting Who You Paid
Organizations filing Form 990 must complete Schedule I when they give more than $5,000 in total grants or assistance to any single domestic organization or government during the tax year. The same threshold applies to aggregate payments to domestic individuals for scholarships, fellowships, stipends, and similar grants.18Internal Revenue Service. 2025 Instructions for Form 990 Return of Organization Exempt From Income Tax Failing to file at all for three consecutive years causes automatic revocation of tax-exempt status.13Internal Revenue Service. How to Lose Your 501(c)(3) Tax-Exempt Status (Without Really Trying)
Beyond the tax return, keep an internal file for every significant distribution: the recipient, the amount, the charitable purpose, any grant agreement, and any follow-up reports. The IRS advises keeping records as long as they may be relevant to items on your return, and at least four years for employment records.19Internal Revenue Service. Recordkeeping Most nonprofit attorneys recommend at least seven years for grant files, and permanent retention for large or unusual distributions.