Receiving notice that a nonprofit organization has been awarded a grant is a significant milestone, often reflecting months of preparation and a funder’s confidence in the organization’s mission. Yet the work of responsibly managing a grant is only beginning.
From the moment an award letter arrives, a nonprofit takes on legal and administrative obligations that, if handled carelessly, can create tax problems, jeopardize public charity status, or strain the relationship with the funder.
At Abelaj Law, PC, we counsel nonprofit organizations, boards, and executives on the full lifecycle of grant funding, from evaluating award terms through satisfying the reporting obligations that follow.
Read the Grant Agreement Before Accepting It
Every grant comes with terms, whether stated in a formal, signed agreement or embedded in an award letter that incorporates the funder’s published guidelines. Before spending any funds, the organization should clearly understand what the grant permits, requires, and prohibits. Key provisions typically address:
- The specific purpose for which the funds may be used
- Any timeline for spending the funds or completing associated activities
- Reporting requirements, including financial reports, narrative updates, or outcome data
- Restrictions on administrative or overhead costs
- What happens if the funds are not used as intended, including repayment obligations
Grant terms form a binding commitment, and a nonprofit that accepts an award without reading the underlying terms may unknowingly agree to conditions the organization cannot practically meet.
Restricted Versus Unrestricted Funds
One of the most consequential distinctions in grant management is whether an award is restricted or unrestricted. Unrestricted funds may generally be used for general operations. Restricted funds are earmarked for a specific program, project, or purpose, and using restricted funds for anything else can constitute a breach of the grant agreement and, depending on the circumstances, a breach of fiduciary duty by the board.
Nonprofits should track restricted funds separately from general operating funds. Under generally accepted accounting principles for nonprofit organizations, restricted and unrestricted net assets are reported separately, and an auditor or accountant will expect documentation showing that restricted funds were spent consistently with the funder’s restrictions.
Board Acknowledgment and Internal Approval
Depending on the size of the grant and the organization’s governance structure, the board or an authorized committee may need to formally accept the award, particularly where it carries reporting obligations, matching requirements, or multi-year conditions. Board minutes reflecting this acceptance, along with a summary of the grant’s material terms, create a documentation trail that can prove valuable if questions arise later from an auditor, the funder, or the Internal Revenue Service.
Government Grants Carry Additional Obligations
Grants funded, in whole or in part, by federal, state, or local government sources often bring compliance obligations beyond those found in private grants. Organizations receiving federal funds, directly or as a subrecipient, may be subject to the Uniform Guidance found at 2 C.F.R. Part 200, which addresses cost principles, procurement standards, and audit requirements, including a single audit requirement once federal expenditures exceed a specified threshold in a fiscal year.
Government grant agreements frequently include recordkeeping and allowable cost provisions that differ meaningfully from private foundation or corporate grant terms.
Grants From Private Foundations May Involve Expenditure Responsibility
When the funder is a private foundation, additional considerations can arise, particularly if the grant is not made to another public charity in the ordinary course. Private foundations are generally required to exercise expenditure responsibility over certain grants under Internal Revenue Code Section 4945, which involves a pre-grant inquiry, a written grant agreement with specific required terms, and periodic reports from the grantee describing how the funds were used.
A nonprofit receiving this type of grant should expect, and be prepared to satisfy, these documentation requests, since a foundation’s failure to obtain them can expose it to excise taxes on what the Code treats as a taxable expenditure.
Consider the Effect on Public Charity Status
For organizations classified as public charities under Internal Revenue Code Sections 509(a)(1) and 170(b)(1)(A)(vi), maintaining that status depends in part on receiving a sufficiently broad base of public support, measured under the public support test. A single, unusually large grant can, in some circumstances, affect this calculation, particularly for smaller or newer organizations. The tax code provides certain exceptions and averaging rules across a five-year measurement period, but an organization receiving a substantial grant should still evaluate, with its accountant or counsel, whether the award affects its public support percentage.
Reporting the Grant on Form 990
Grants received by a tax-exempt organization must generally be reported on the organization’s annual Form 990. Even where a nonprofit is solely a grant recipient, the funds received, and often the identity of significant funders, must be reflected accurately in its public filings.
Why Legal Guidance Matters After an Award
A grant award is an opportunity that comes with obligations extending well past the initial celebration. Reviewing grant terms, structuring internal accounting and reporting practices, and understanding how an award interacts with the organization’s tax-exempt status all benefit from careful legal and tax analysis. At Abelaj Law, PC, we work with nonprofit boards and executives to review grant agreements, advise on compliance obligations, and coordinate with the organization’s accountants so that a grant strengthens the organization rather than creates unexpected complications. If your organization has recently been awarded a grant, or if you would like guidance before accepting one, we invite you to contact Abelaj Law, PC.
Frequently Asked Questions
Can a nonprofit use grant funds for administrative overhead?
It depends on the terms of the specific grant. Some funders permit a percentage of the award to be allocated toward administrative or indirect costs, while others restrict funds exclusively to direct program expenses. The grant agreement or award letter should specify what is permitted.
What happens if a nonprofit cannot spend a restricted grant as originally planned?
Organizations facing this situation should contact the funder before reallocating the funds. Many funders will consider a request to modify the permitted use, but using restricted funds differently without the funder’s consent can constitute a breach of the grant agreement.
Do grant funds count as taxable income to the nonprofit organization?
Generally, grants that further a tax-exempt organization’s exempt purpose are not treated as unrelated business taxable income. However, if a grant closely resembles payment for services rendered under a contractual arrangement, the analysis can differ, and the specific facts should be reviewed with tax counsel.
Does accepting a grant require a formal contract between the funder and the nonprofit?
Not always. Some grants are documented through a signed grant agreement, while others are conveyed through an award letter that incorporates the funder’s published guidelines by reference. Regardless of the format, the terms are generally binding on the recipient organization.