America is a giving nation. American philanthropic dollars frequently cross United States borders and fulfill needs throughout the world.
While it is permissible for private foundations to donate to foreign-based organizations, doing so can create administrative burdens they might not wish to manage.
If a private foundation fails to follow correct procedures, funds gifted to organizations located outside the U.S. are considered a taxable expenditure.
This means they are subject to an entity-level and possibly a manager-level excise tax, both of which are excise taxes that can be significant.
In order to avoid these excise taxes, the private foundation should determine if the foreign donee has a determination letter from the IRS showing it is a U.S. public charity or a U.S. private operating foundation, designations that would allow for tax-free giving.
If the foreign donee doesn’t have a determination letter, there are several options available to ensure the grant is a qualifying distribution not subject to an excise tax.
The first option involves making a “good faith determination” regarding the foreign donee and its operations.
To do this, the private foundation should request an affidavit from the donee or a written opinion from the legal counsel of the private foundation or foreign charity stating the foreign charity would qualify as a U.S. public charity or U.S. private operating foundation.
If this is done, the foundation can donate funds to the foreign charity. IRS Revenue Procedure 92-94 outlines the proper documentation and procedures in order to satisfy the “good faith determination” rules.
The private foundation can also make a specific grant to a foreign entity that perhaps wouldn’t qualify as a U.S. public charity or operating foundation if it exercises “expenditure responsibility.”
To do this, a reasonable effort must be made and internal procedures created to ensure the following occurs: the foreign grant is spent solely for the purpose it was made, a thorough report from the grantee on how the funds were spent must be obtained, and the foundation must make a complete report concerning the expenditure to the Commissioner of the Internal Revenue Service.
Private foundations should be aware of the rules regarding taxable expenditures as excise taxes can turn into large dollar amounts.
In order to reduce risks associated with these gifts private foundations may wish to make donations to a U.S. public charity in lieu of donations to foreign charities.
Finding a U.S. public charity that supports the foreign cause will likely be easier than meeting the tests listed above. And U.S. public charities can make donations to foreign organizations with less administrative burdens and restrictions than can private foundations.
Robin Dennis, CPA, is a manager in the tax department of Clark Schaefer Hackett, an accounting and consulting firm based in Ohio.