Making Grants to Individuals: What Nonprofits Need to Know

As inflation continues to squeeze family budgets and the cost of living remains stubbornly high, more Americans are struggling to afford basics—from groceries and rent to youth activities that were once considered standard middle-class experiences. Spikes in rent, energy costs, and health h insurance are forcing more and more families to choose between those costs and putting food on the table.

Many charitable organizations are responding by providing direct financial assistance to individuals and families in crisis. Whether it’s supporting families facing eviction, covering medical costs, or assisting with basic necessities, these grants serve critical needs in our communities.

But good intentions aren’t enough. Nonprofits need to navigate important IRS requirements to ensure their grant programs don’t jeopardize their tax-exempt status, even as the urgency of the need tempts organizations to cut corners or move too quickly.

The Charitable Class Requirement

The IRS requires that grants to individuals be made to members of a “charitable class“—a group that’s broad enough to benefit the public rather than specific, predetermined individuals. Here are the key elements:

Indefiniteness Matters

Your beneficiary group must be indefinite. As the saying goes, “charity ends where specificity in beneficiaries begins.” You can’t know who the specific grant recipients will be when you establish the program.

For example, if you create a fund for the survivors of one specific fallen officer, that’s too narrow. But a program for survivors of fallen officers generally? That works.

Size Counts

The larger the pool of potentially eligible recipients, the better. The IRS looks favorably on programs where many people could potentially qualify for assistance.

Given the breadth of today’s economic challenges, with record numbers of families struggling with housing costs, food insecurity, and medical care, most well-designed assistance programs will naturally serve a large potential class.

Watch Out for Earmarked Funds

Here’s a common pitfall that becomes especially tempting during economic crises: accepting donations designated for a specific individual. When a donor approaches your organization saying, “I want to help the family I heard about on social media who can’t afford their medical treatment,” it’s tempting to facilitate that gift. Don’t.

This can make the IRS view your program as serving private rather than public interests, which threatens your charitable purpose.

The solution? Don’t allow donors to designate specific recipients in your fundraising materials. You can, however, highlight past recipients as examples of your program’s impact and success stories, like featuring a family that was able to keep a roof over their head despite job loss, or a single parent who received assistance energy bills.

Selection Must Be Objective and Nondiscriminatory

Once you’ve defined an appropriate charitable class, you need a fair selection process. This is especially important when demand for assistance outstrips available resources, as is increasingly common in the current economic climate.

Relevant Selection Criteria

Your criteria should relate to your grant’s purpose. If you’re assisting people in financial distress due to high cost of living, economic need should be part of your selection criteria. You might consider factors like:

• Income relative to area median or federal poverty level
• Unemployment or underemployment
• Recent financial shocks (medical bills, job loss, unexpected expenses)
• Housing cost burden
• Family size and dependents

Avoid Conflicts of Interest

The people selecting grant recipients shouldn’t be in a position to benefit, directly or indirectly, from choosing certain individuals over others. This is about maintaining integrity in your selection process, even when a board member’s neighbor or a staff member’s friend desperately needs help.

Tax Implications for Recipients

Here’s good news for families already stressed about money: in most cases, grants from charitable organizations are treated as gifts under Code Section 102(a), meaning recipients don’t have to pay taxes on the assistance they receive. In an environment where every dollar counts, that assistance goes entirely to meeting the need.

The key is that transfers must be made out of “detached and disinterested generosity”, not in exchange for services or with expectations of benefit to your organization.

Critical takeaway: Don’t attach strings to your grants that could benefit your organization. That could convert a tax-free gift into taxable income for the recipient, adding a tax burden to someone already in financial distress. For example, don’t require grant recipients to volunteer for your organization, attend religious services or programs, or provide testimonials or promotional materials. Do make grants freely to meet genuine need.

Special Rules for Private Foundations

If your organization is a private foundation rather than a public charity, additional requirements may apply. For example, private foundations must obtain advance approval from the IRS for any grant programs that provide scholarships, fellowships, or grants for travel, study, or similar purposes. This means submitting detailed procedures to the IRS and receiving a favorable determination letter before making any grants under such programs.

This advance approval requirement doesn’t apply to emergency hardship grants or other assistance that isn’t for educational travel or study purposes, but foundations should carefully evaluate whether their proposed program triggers this requirement before launching.

Company-Related Foundations Face Extra Scrutiny

Foundations that provide benefits to employees of a particular company face additional rules and heightened IRS scrutiny. If your foundation’s grant program is designed to benefit current or former employees of a specific employer (or their families), you must be especially careful to ensure:

• The program serves a sufficiently broad charitable class
• Selection procedures are truly objective and independent from company influence
• The program doesn’t function as disguised compensation or an employee benefit plan
• Grants aren’t disproportionately awarded to highly compensated employees or company insiders

These company-related foundations should work closely with experienced legal counsel to structure compliant programs, as the IRS will carefully examine whether the foundation serves charitable purposes or merely provides private benefits to the company and its workforce.

Practical Steps for Crisis Response

To implement a compliant grants-to-individuals program that responds to today’s economic challenges:

1. Define a broad, indefinite charitable class (e.g., “low-income families in [County] struggling to afford food”
2. Establish objective selection criteria related to financial need and your charitable purpose
3. Create a conflict-free selection committee that can fairly evaluate applications even when demand exceeds resources
4. Prohibit earmarking of donations for specific individuals, no matter how compelling their story
5. Make grants freely, without strings attached that benefit your organization
6. Document your policies and procedures thoroughly—good documentation protects your organization and demonstrates compliance
7. Move quickly but carefully—urgent need doesn’t excuse non-compliance, but your procedures should allow for timely assistance
8. If you’re a private foundation, determine whether you need IRS advance approval before launching any travel or study grant programs
9. If you’re a company-related foundation, ensure additional safeguards are in place to demonstrate charitable rather than private benefit

The Bottom Line

As the cost of living crisis continues to strain family budgets and push essentials out of reach for many Americans, charitable organizations play a vital role in bridging the gap. Direct grants to individuals can be powerful tools for fulfilling your mission—helping families stay housed, keeping kids engaged in enrichment activities, and providing dignity during difficult times.

With proper planning and clear guidelines, your organization can respond meaningfully to today’s economic challenges while staying fully compliant with IRS requirements. The key is ensuring your program serves a genuine public interest through objective processes, not predetermined individuals or private interests.

The need is real, the potential class of beneficiaries is large, and properly structured grant programs can make an enormous difference in your community during these economically challenging times.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.