Yes, your charity can give scholarships straight to students. The money has to serve a charitable purpose, and winners have to be picked instead of hand-chosen by insiders.
At Abelaj Law, PC, our NY nonprofit legal counsel helps New York City charities build scholarship programs that follow IRS and state rules. Those rules depend on how your organization is set up and who is allowed to apply, so our nonprofit attorney starts with those two questions.
Can a Scholarship Be Limited to NYC Residents or One Borough?
A charity may limit its pool by geography, whether the fund pays for school or helps families after a disaster. The IRS asks that the group of possible winners, called a charitable class, be large enough or open enough that nobody knows in advance who will get the money.
Where a student lives or goes to school is generally not a protected trait under discrimination laws. Limits like these generally pass:
- Residents of Brooklyn or Manhattan
- Seniors at a named public high school
- Students accepted to a CUNY campus
- Families displaced by a fire or flood
A fund for Bronx high school students going into science, technology, engineering, or math can pass because thousands of students fit that description. A fund set up for three teenagers chosen in advance generally would not. Picking three winners from an open pool of applicants is fine. Criteria tied to race, religion, or sex raise separate tax and civil rights questions that need legal review first.
Can an NYC Company Foundation Fund Scholarships for Employees’ Children?
Company-funded private foundations can do so, with tight limits. Picture a Midtown real estate firm whose corporate foundation wants to pay college costs only for the children of its staff. The IRS worries that awards like these are extra pay in disguise.
The program generally passes if awards go to no more than 25% of the eligible children who applied and were considered by the committee. A second option caps awards at 10% of all eligible children, whether they applied.
The company also cannot use the scholarship to recruit workers or keep them from leaving. Our scholarship program compliance lawyer can test your numbers before award letters go out.
Is Your NYC Scholarship Program Compliant?
Three questions show most of your risk. Our NY nonprofit legal counsel starts every scholarship review with them.
Is Your Organization a Public Charity or a Private Foundation?
Your IRS determination letter gives the answer. Public charities get money from many donors, while private foundations are usually funded by one family or company and face stricter rules. If you are still forming, our NYC nonprofit formation attorney can explain which status fits your funding.
Is Your Selection Committee Independent of Your Board?
Company-related programs must use a committee with no ties to the employer or the foundation. Other charities have more room, but board members, big donors, and their relatives should not be eligible to win.
Can You Track Whether the Money Paid for Tuition?
Paying the school directly is the simplest method. If you pay the student, ask for a tuition bill or transcript every term.
IRS Rules for Charity Scholarships in New York City
Private foundations carry the heaviest burden under Internal Revenue Code Section 4945(g). The foundation must award every grant on an objective and nondiscriminatory basis, and the IRS must approve its selection procedures in advance. Skipping approval triggers a penalty tax on the foundation.
Public charities do not need pre-approval. They still must pick winners from a real charitable class and be able to show how they chose.
What Does the New York Charities Bureau Require?
The Attorney General’s Charities Bureau, based in Lower Manhattan, watches over charitable money in the state. Under New York Estates, Powers and Trusts Law § 8-1.4, most organizations holding assets for charitable purposes must register and file a financial report every year. When the numbers do not add up, the Bureau has several tools:
- Demanding books and records
- Opening an investigation
- Taking the charity to the State Supreme Court
Clean scholarship files make those steps far less likely. Our NY nonprofit legal counsel can check your registration and annual filings, along with your scholarship paperwork.
Step-by-Step Checklist for Awarding Scholarships in NYC
A written process protects your charity and treats applicants fairly. Follow these five steps in order:
- Set Up a Selection Process Without Conflicts: Have decision-makers disclose any ties to applicants or major donors and step aside when they have one.
- Define Objective Criteria: Base choices on measurable factors like financial need, grades, or community service.
- Draft a Scholarship Agreement: State the terms, the reports you expect, and what the money may cover, such as tuition and books.
- Obtain IRS Approval When Required: Private foundations generally request approval through Form 8940 or through Schedule H when submitting the full Form 1023 exemption application.
- Keep Records for at Least Three Years: Save applications, selection notes, award terms, and payment records in case the Charities Bureau asks to see them. Keep board minutes and founding documents for good.
Put the finished process in a board resolution. Future directors can then follow the same steps.
Frequently Asked Questions About New York Charity Scholarships
Once a scholarship fund starts paying awards, questions about taxes and donor control tend to follow.
Is a Scholarship Taxable Income for the Student?
Usually not. A degree-seeking student who spends the award on tuition, required fees, and books does not owe tax on it, but money used for housing or meals counts as taxable income.
Does My Charity Have to Send Scholarship Winners a Form 1099?
Generally, no. The IRS tells organizations not to report scholarship grants on Form 1099-MISC, though an award that pays a student for work, such as teaching or research, is reported as wages on a Form W-2.
Can a Donor Choose Which Student Gets the Award?
No. Donors may help write the criteria, but the charity must control the final choice, and a gift set aside for one named student is generally not tax-deductible.
Get Your NYC Scholarship Plan Checked Before the First Award
Fixing a selection process is far easier before a check goes out than after the IRS or the Charities Bureau starts asking questions. Abelaj Law will listen to your board’s goals, explain your options, and work with you on the criteria and paperwork. Call our NY nonprofit legal counsel or request a consultation before application season opens.