TLDR
Grantmaking compliance sits with the funder, not the recipient — but understanding grantmaking regulations helps grants managers interpret grant agreement terms, recognize when an unusual condition stems from funder-side IRS compliance obligations, and understand why certain reporting requirements (like expenditure responsibility reports) are non-negotiable regardless of how the funds were spent.
Grantmaking is the institutional process of identifying eligible recipients, awarding funds for charitable purposes, and maintaining oversight of how those funds are used — the full cycle of transferring philanthropic resources from funder to recipient. It is distinct from grant management: most nonprofits receive grants; private foundations, community foundations, and corporate foundations make them. The compliance obligations flow in both directions but are different in character.
Regulatory Source: IRC Section 4945
For private foundations, the governing compliance provision is IRC Section 4945, which defines taxable expenditures — grants that subject the foundation to a 20% excise tax. A grant to any organization that is not a U.S. public charity is a taxable expenditure unless the foundation exercises expenditure responsibility under IRC Section 4945(h) and 26 CFR 1.4945-5, or obtains an equivalency determination that the recipient qualifies as the equivalent of a public charity.
Expenditure responsibility requires: a written grant agreement restricting use to the approved charitable purpose, a separate bank account for grant funds at the grantee, periodic reports from the grantee on expenditures, investigation of any fund diversion, and disclosure on Form 990-PF, Part IX-B.
Government grantmaking operates under a different framework — 2 CFR 200 cost principles and appropriations law — with no excise tax exposure but its own set of cost allowability and procurement constraints.
Accounting Treatment
On the grantmaker’s books under ASC 958 (GAAP for not-for-profit entities), an unconditional grant commitment is recognized as an expense and a liability (grants payable) in the period the agreement is executed, even if disbursement is multi-year. A conditional grant — where the grantee must meet a performance condition before receiving funds — is recognized as expense when the condition is substantially met.
Private foundations must track grants as qualifying distributions toward the IRC Section 4942 minimum distribution requirement: at least 5% of the fair market value of investment assets annually. Multi-year grant commitments count in the year committed, not the year paid, which affects the foundation’s distribution planning.
Common Misconception
The most common misconception is that grantmaking compliance sits entirely with the recipient. In practice, a private foundation that awards a grant to a non-public-charity recipient without exercising expenditure responsibility has itself committed a taxable expenditure — regardless of whether the grantee spent the funds appropriately. The foundation owes the excise tax, not the grantee. The compliance obligation persists throughout the grant period: grantmaking is not complete at disbursement, and the foundation remains responsible for monitoring, investigating diversions, and filing the required 990-PF disclosures until the grant is fully expended and reported.
Example
A family foundation awards a $75,000 grant to an unincorporated community organization without 501(c)(3) status. Because the recipient is not a public charity, the foundation executes a written grant agreement under IRC Section 4945(h) restricting funds to the approved purpose (youth programming), requires a separate bank account, and requires a final expenditure report within 30 days of project completion. The foundation discloses the grant in Form 990-PF, Part IX-B for each year in which funds remain unspent. Without these steps, the award is a taxable expenditure — a 20% excise tax on the foundation and potentially on the foundation managers who approved it.
Free resource
Get the Nonprofit Grant Compliance Checklist
A practical checklist for post-award grant compliance: restricted funds, reporting cadence, audit prep, and common failure points. Delivered by email.