Understanding Expenditure Responsibility: A Guide for Grantees

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Who Is This Guide For

This article is for people or organizations who are receiving (or planning to receive) grants from private foundations that require Expenditure Responsibility. It's especially relevant for organizations that aren't classified as public charities under U.S. tax law, foreign organizations, or other entities subject to special grant oversight requirements.


What is Expenditure Responsibility?

Expenditure Responsibility (ER) is a set of procedures that private foundations must follow when making grants to organizations that are not classified as public charities by the Internal Revenue Service (IRS). Expenditure Responsibility requirements are established by the IRS to ensure that grants made to organizations that are not public charities are used exclusively for charitable purposes. As a grantee, you may encounter these requirements when receiving funding from a private foundation, especially if your organization is:

  • Not a 501(c)(3) public charity
  • A private foundation
  • A foreign organization without U.S. public charity equivalency
  • A for-profit entity
  • Another type of organization (such as a 501(c)(4) or government entity)

Why Do Grantors Use Expenditure Responsibility?

Private foundations use Expenditure Responsibility because they are legally required to ensure grant funds are used exclusively for charitable purposes. Without following ER procedures, foundations could face substantial penalty taxes on grants made to non-public charities.
For the grantor, ER consists of three main obligations:

  • Ensuring grant funds are spent only for the specific charitable purpose intended
  • Obtaining complete reports from you (the grantee) on how funds are spent
  • Submitting detailed reports about the grant to the IRS

What to Expect as a Grantee

If you're receiving a grant that requires Expenditure Responsibility, here's what you can expect from the process:

Pre-Grant Inquiry

Before finalizing your grant, the foundation will conduct a pre-grant inquiry (also called 'Due Diligence') to assess:

  • Your organization's history and experience
  • Your ability to fulfill the charitable purpose of the grant
  • Your management practices and financial stability
  • Your track record with previous grants (if applicable)

This may involve providing organizational documents, financial statements, and information about your leadership.

Grant Agreement Requirements

Your grant agreement may contain specific language and requirements, including:

  • Detailed description of the charitable purpose of the grant (common on almost all grant agreements)
  • Requirement to return any unused funds (common on almost all grant agreements)
  • Prohibition on using funds for lobbying, political campaigns, or other non-charitable activities (common on almost all grant agreements, a legal requirement for funds from a 501(c)3)
  • Restriction that funds can only be used for the specified purpose; if there are no restrictions it may list 'General Purpose'
  • Required reporting schedule and content
  • Agreement to maintain separate accounting for grant funds (uncommon on a grant agreement)
  • Permission for the grantor to review your books and records related to the grant (uncommon on a grant agreement)

Ongoing Reporting Requirements

You'll need to provide reports to the grantor that include:

  • How grant funds were used (specific expenses such as salaries, supplies, travel)
  • Progress toward achieving the grant's charitable purpose
  • Confirmation of compliance with grant agreement terms

The first report is typically due within a reasonable time after the end of your fiscal year in which you received funds. Annual reports continue until all grant funds are spent or the grant is terminated. A final report must cover all expenditures over the life of the grant.

How to Prepare for Expenditure Responsibility

Record-Keeping Best Practices

Maintaining proper documentation is crucial. Establish systems to:

  • Create a separate account or tracking system for the grant funds
  • Keep detailed records of all receipts and expenditures
  • Document how each expense relates to the grant's purpose
  • Retain all relevant invoices, receipts, and payment records
  • Save copies of all reports submitted to the grantor
  • Document your progress toward grant objectives

Financial Management Tips

  • Consider setting up a separate bank account or designated fund for the grant
  • Create a system to track grant expenditures against your approved budget
  • Regularly reconcile grant expenses with your overall financial records
  • Establish internal controls to ensure funds are used as intended
  • Have a process for approving expenses against the grant

Report Preparation

Develop a system for preparing comprehensive and accurate reports:

  • Calendar the due dates for all required reports; giving yourself plenty of time to complete the report
  • Gather documentation throughout the grant period, not just at reporting time
  • Use the grantor's preferred format or template when available
  • Include both financial information and narrative progress updates
  • Be specific about achievements, challenges, and plans
  • Address any changes in approach or timeline

Common Challenges and Solutions

Challenge: Tracking Specific Expenditures
Solution: Implement accounting codes specifically for the grant, and train staff on proper expense coding.

Challenge: Meeting Reporting Deadlines
Solution: Set internal deadlines ahead of actual due dates. Create calendar reminders for report preparation.

Challenge: Changes to Project Plans
Solution: Communicate with your grantor early about any necessary changes. Many grantors understand that adjustments may be needed, but they need to document and approve these changes.

Challenge: Staff Transitions
Solution: Document grant requirements and procedures so new staff can understand obligations. Inform the grantor of significant staff changes.

Conclusion

Understanding Expenditure Responsibility requirements helps you build a stronger relationship with your funders while ensuring compliance with IRS regulations. By establishing good systems for tracking, reporting, and communication, you can successfully manage grants subject to ER requirements while focusing on your charitable work.

Remember that these procedures, while sometimes seeming bureaucratic, ultimately serve to ensure that charitable funds are used appropriately and effectively for their intended purposes.