IRC 4945 Taxable Expenditures: Lobbying, Individual Grants, and Expenditure Responsibility

What Are Taxable Expenditures Under IRC 4945?

Private foundations occupy a unique position in the tax-exempt universe: they enjoy significant tax advantages, but Congress imposed a detailed behavioral code to ensure those advantages serve charitable purposes. IRC 4945 is the expenditure discipline provision. It defines five categories of "taxable expenditures" -- amounts a private foundation pays or incurs for prohibited purposes -- and backs that definition with a two-tier excise tax structure that can reach 100% of the expenditure if the foundation does not promptly correct the violation.

The statute covers grants to individuals without advance IRS approval, grants to non-public organizations without expenditure responsibility, lobbying in any form, electioneering, and payments for purposes outside the foundation's exempt mission. Understanding which transactions fall within each category, what exceptions apply, and how to document compliance is the core of IRC 4945 practice.

Two threshold concepts drive penalty severity throughout the regime: whether the expenditure was "knowing" (the manager had actual knowledge, not merely constructive knowledge, that it was a taxable expenditure) and whether it was "willful and flagrant" (knowing disregard of the prohibition). A knowing but non-willful manager faces a first-tier personal tax; willful-and-flagrant conduct can support IRS referral for additional sanctions and denial of abatement. Both foundation and management must understand where those lines fall before approving any ambiguous payment.

The Five Statutory Categories of Taxable Expenditures

IRC 4945(d) lists the five categories exhaustively. Each has its own regulatory elaboration and, in some cases, statutory exceptions. Practitioners must analyze a proposed expenditure against each category before the foundation commits the funds.

Category 1: Lobbying -- Influencing Legislation (IRC 4945(d)(1))

Any amount paid or incurred to "carry on propaganda, or otherwise to attempt to influence legislation" is a taxable expenditure. Treas. Reg. 53.4945-2 defines this broadly to encompass both direct lobbying (direct communication with a member of a legislative body or their staff with respect to pending legislation) and grassroots lobbying (communications that encourage members of the public to contact legislators about specific legislation). The definition captures written materials, advertisements, funding of outside organizations earmarked for lobbying, and staff time allocable to legislative advocacy.

Unlike public charities, private foundations have no IRC 501(h) election to cap lobbying expenditures at a defined percentage of exempt-purpose expenditures. The prohibition is absolute. Nonpartisan analysis and study that presents a sufficiently full and fair exposition of pertinent facts may be permissible under Reg. 53.4945-2(d)(2), but practitioners should analyze the "direct" and "indirect" advocacy components before relying on that exception.

A voter registration exception exists: amounts expended on voter registration drives that satisfy all five requirements of IRC 4945(f) are not taxable expenditures under category 1 or category 2. Those requirements are addressed separately below.

One frequently misunderstood application: a foundation grant to a 501(c)(4) or other advocacy organization is a taxable expenditure if the grant is earmarked -- expressly or impliedly -- for lobbying purposes, even if the foundation itself makes no direct legislative contact. "Earmarking" includes oral representations, side agreements, and prior patterns of funding that suggest the grant's intended use. Practitioners should document that any grant to an advocacy organization is for a specific charitable program, not for the organization's general advocacy operations.

Category 2: Influencing Elections and Non-Qualifying Voter Registration Drives (IRC 4945(d)(2))

Any amount a private foundation pays or incurs to influence the outcome of a public election, or to carry on voter registration drives that do not satisfy the five requirements of IRC 4945(f), is a taxable expenditure. This category reaches contributions to political campaigns, expenditures supporting or opposing candidates, get-out-the-vote efforts tied to a particular election, and voter registration programs that operate in only one state, are partisan, or that are not ongoing across elections.

Category 3: Individual Grants Without Advance IRS Approval (IRC 4945(d)(3))

Grants to individuals for travel, study, or "similar purposes" -- including scholarships, fellowships, internship awards, prizes, and research grants -- are taxable expenditures unless the IRS has granted advance approval of the foundation's grant procedures under IRC 4945(g). The full advance approval procedure is covered in detail below. Grants that do not constitute travel, study, or a "similar purpose" (for example, emergency hardship grants that are not tied to a study or research purpose) may fall outside category 3 entirely, but practitioners should confirm that characterization in writing before the grant is made.

Category 4: Grants to Non-Public Charities Without Expenditure Responsibility (IRC 4945(d)(4))

When a private foundation makes a grant to an organization that is not a public charity under IRC 509(a)(1), (2), or (3) -- including for-profit entities, foreign organizations that have not received a favorable determination letter, supporting organizations that are not Type I or II, and IRC 501(c)(4), (5), or (6) organizations -- the grant is a taxable expenditure unless the foundation exercises expenditure responsibility as defined in IRC 4945(h) and Treas. Reg. 53.4945-5. The expenditure responsibility procedure is addressed in detail below.

Category 5: Non-Charitable Purpose Expenditures (IRC 4945(d)(5))

Any amount paid or incurred for a purpose other than a purpose specified in IRC 170(c)(2)(B) is a taxable expenditure. IRC 170(c)(2)(B) describes religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. A foundation that pays for activities outside these purposes -- even if the payment otherwise appears innocuous -- incurs a taxable expenditure under this residual category. This category is most commonly implicated by administrative expenses that cannot be allocated to exempt-purpose activities and by payments that serve private interests rather than a charitable class.

Two-Tier Excise Tax Escalation

IRC 4945(a) and (b) create a two-tier penalty structure that tracks the same architecture used elsewhere in the Chapter 42 private foundation rules. The first tier penalizes the initial violation; the second tier penalizes failure to correct.

First-Tier Tax (IRC 4945(a))

The first-tier tax is 20% of each taxable expenditure, assessed against the private foundation. A foundation manager who "knowingly and without reasonable cause" agreed to the making of the expenditure faces an additional first-tier tax of 5% of the same amount, capped at $10,000 per taxable expenditure. "Knowing" requires actual knowledge of the facts that make the expenditure a taxable expenditure -- not merely constructive knowledge -- but the manager need not know that the legal prohibition applies. Where multiple managers are involved, each faces the 5% tax independently up to the $10,000 cap, and liability is joint and several.

Second-Tier Correction Tax (IRC 4945(b))

If the foundation does not correct a taxable expenditure within the correction period -- generally, the period ending 90 days after the IRS mails a deficiency notice for the first-tier tax -- a second-tier tax of 100% of the taxable expenditure is imposed on the foundation. A foundation manager who "refuses to agree to part or all of the correction" faces a 50% tax on the uncorrected amount, capped at $10,000 per expenditure.

Correction means recovering the funds from the grantee or recipient and placing the foundation in a financial position not worse than it would have been had the taxable expenditure not been made. For grant expenditures, this typically requires the foundation to demand repayment of the grant funds. For lobbying expenditures, correction means recovering the amount paid to the extent possible. The foundation reports both first- and second-tier taxes on Form 4720.

"Willful and Flagrant" Conduct

Where a taxable expenditure is willful and flagrant -- meaning the foundation or its managers knowingly and intentionally disregarded the IRC 4945 prohibition -- the IRS has authority to seek additional remedies, including referral to the Department of Justice. Willful-and-flagrant conduct also affects abatement eligibility: a foundation seeking abatement of first-tier taxes under IRC 4962 must demonstrate that the violation was due to reasonable cause and not willful neglect. A pattern of repeated taxable expenditures of the same type is strong evidence of willful disregard.

Section 4945(g) Advance Approval for Individual Grants

The primary mechanism for private foundations to make grants to individuals without triggering the IRC 4945(d)(3) taxable expenditure is to obtain IRS advance approval of the foundation's grant procedures. IRC 4945(g) provides that individual grants are not taxable expenditures if the foundation awards them "on an objective and nondiscriminatory basis" pursuant to "a procedure approved in advance by the Secretary."

What Types of Grants Require Advance Approval

Any grant to an individual for travel, study, or a "similar purpose" falls within IRC 4945(d)(3). The IRS and courts have construed "similar purpose" broadly to include:

• Scholarships and fellowships (undergraduate, graduate, postdoctoral)
• Internship awards and stipends
• Research grants for basic or applied research (to individuals -- see amber callout below for for-profit research entity grants)
• Prizes and awards related to past achievement where there is any expectation of future performance or reporting
• Emergency assistance grants where the recipient is selected on a study- or research-related basis

Application Requirements

The foundation submits a ruling request to the IRS (addressed to the Exempt Organizations Technical office) describing, at minimum:

• The purpose of the grant program and the class of intended recipients
• The objective, nondiscriminatory criteria for selecting grant recipients
• The process for selecting recipients (review committee, independent panel, blind review, etc.)
• The supervisory or follow-up procedures the foundation will use to verify funds are used for the approved purpose
• The reporting requirements imposed on individual recipients (interim reports, final report, return of unexpended funds)
• Whether any current or past grantees are disqualified persons under IRC 4946

IRS Response and Safe Harbor Scope

The IRS reviews the submission and issues a ruling letter approving or declining to approve the procedures. IRS processing timelines vary; no codified response deadline applies. Practitioners should budget 12 to 24 months or more depending on current IRS Exempt Organizations rulings workload. Once approval is received, grants made in conformity with the approved procedures are not taxable expenditures -- but approval is prospective only. Grants made before the ruling letter issues, or outside the approved procedures, remain taxable expenditures.

The foundation must disclose its approved grant program on Form 990-PF and must report individual grants made under the program in Part IX-B. The approval does not expire on a fixed schedule, but the safe harbor is void prospectively if the foundation's actual grant practices deviate from the approved procedures.

Form 990-PF Disclosure

Part IX-B of Form 990-PF requires the foundation to list each grant program for which it has received advance approval, describe the program's purpose and procedures, and confirm that grants were made in accordance with those procedures. Each individual grant must be listed in Part IX-A (Grants and Contributions Paid) with the recipient's name, purpose, and amount.

Expenditure Responsibility for Non-Public Charity Grants

When a private foundation makes a grant to an organization that is not a public charity under IRC 509(a)(1), (2), or (3) -- including domestic for-profit entities, foreign organizations, IRC 501(c)(4) through (c)(6) entities, and certain supporting organizations -- it must exercise expenditure responsibility under IRC 4945(h) to avoid a taxable expenditure. Expenditure responsibility is a documented supervision regime that puts the grantee on contractual notice that the funds must be used solely for the charitable purpose for which the grant was made.

When Expenditure Responsibility Is Required

• Grants to domestic non-public charities, including IRC 501(c)(4), (5), and (6) organizations
• Grants to for-profit entities (any corporate, LLC, partnership, or sole proprietorship structure)
• Grants to foreign organizations where the foundation has not obtained an equivalency determination (treating the foreign organization as the equivalent of a public charity under Rev. Proc. 92-94) or does not rely on the good-faith determination standard
• Grants to Type III non-functionally integrated supporting organizations (IRC 509(a)(3))
• Certain "unusual grants" to public charities if IRS guidance or facts suggest otherwise

Step-by-Step Expenditure Responsibility Document Workflow

1. Pre-Grant Inquiry. Before making the grant, the foundation must conduct a written inquiry into the grantee's management, financial history, prior use of funds, and whether the grantee has previously diverted funds. Treas. Reg. 53.4945-5(b)(2) requires the inquiry to be in writing and retained in the foundation's records. Verbal due diligence does not satisfy this requirement.
2. Grant Agreement. The foundation must enter into a written grant agreement signed by both parties before or concurrent with the disbursement. The agreement must: (a) specify the purposes for which the funds may be used; (b) commit the grantee to repay any funds not used for the stated purpose; (c) require the grantee to maintain records of its expenditure of the funds; (d) require the grantee to submit annual financial reports; (e) require the grantee to submit a final report upon completion; (f) prohibit the grantee from using the funds for lobbying, electioneering, or non-charitable purposes; and (g) provide for the foundation's right to audit the grantee's use of the funds.
3. Separate Accounting. The grant agreement should require the grantee to maintain the grant funds in a separate account or at minimum to maintain records that segregate the foundation's funds from the grantee's general operating funds.
4. Annual Financial Reports. The grantee must submit annual financial reports describing how the funds were expended during the year, the progress made toward the grant purpose, and any unexpended balance. The foundation must review these reports and take corrective action if diversions are discovered.
5. Final Report. Upon completion of the grant purpose or the grant term, the grantee must submit a final report verifying that all funds were used for the approved purpose, and returning any unexpended balance.
6. Form 990-PF ER Notation. The foundation must disclose on Form 990-PF that it exercised expenditure responsibility with respect to each covered grant. Part IX-B (or the relevant supplemental schedule) requires the foundation to list the grantee, the amount, the purpose, and confirm that reports have been received and reviewed.

Consequences of Incomplete Expenditure Responsibility

A grant subject to expenditure responsibility that is made without a compliant written grant agreement, without a pre-grant inquiry, or without annual grantee reports constitutes a taxable expenditure in its entirety from the date of disbursement. The foundation cannot retroactively satisfy the procedure for the portion of the grant already disbursed -- the best it can do is cure going forward for ongoing multi-year grants and seek repayment or add conditions to minimize second-tier correction tax exposure.

Voter Registration Drives Under IRC 4945(f)

Category 2 taxable expenditures cover amounts paid or incurred to carry on voter registration drives, but IRC 4945(f) creates a statutory exception for drives that meet all five of the following requirements. A drive that fails even one requirement is a taxable expenditure in full.

The Five IRC 4945(f) Requirements

1. Nonpartisan operation. The drive must be conducted in a nonpartisan manner, without reference to or support for any political party, candidate, or political position.
2. Activity in five or more states. The organization carrying on the drive must carry on voter registration activities in five or more states. A drive conducted within a single state or fewer than five states does not qualify, regardless of the level of effort.
3. Expenditure of substantially all income on exempt activities. The organization must expend substantially all of its income on the activities for which it is exempt, including the voter registration drive, in each year it conducts the drive.
4. Receipt of at least 85% of support from public and government sources, not from foundation grants. No more than 25% of the organization's support in any taxable year may come from any single source other than a governmental unit or the general public (or similar aggregate test); and at least 85% of its support in each taxable year must come from public sources (per Treas. Reg. 53.4945-3).
5. No restriction on registration to a particular political party. The organization must not directly or indirectly restrict voter registration activities to members of a particular political party.

IRS Advance Approval for Voter Registration Programs

IRS advance approval under IRC 4945(g) is not required for voter registration drives that satisfy all five IRC 4945(f) requirements -- those drives fall under the statutory exception, not the advance approval procedure. However, foundations that fund voter registration organizations should nonetheless consider seeking an advisory opinion or private letter ruling from the IRS confirming that the grantee's program meets all five requirements, particularly the five-state and support-fraction requirements. Such a ruling, while not binding in all contexts, significantly strengthens the foundation's reasonable cause defense if the IRS later challenges the expenditure.

Interaction With IRC 4940 and IRC 4941

Effect on Qualifying Distributions and IRC 4940

IRC 4940 imposes an excise tax on private foundations' net investment income. The tax rate applied to a given foundation depends in part on whether the foundation makes qualifying distributions (defined in IRC 4942) sufficient to support a reduced rate. Taxable expenditures under IRC 4945 are excluded from the definition of qualifying distributions. A foundation that makes taxable expenditures therefore loses the distribution credit for those amounts, which may increase its effective IRC 4940 burden indirectly. Program officers who track grant-making activity for IRC 4942 minimum distribution purposes must exclude any grants or expenditures that may be taxable expenditures until those grants are confirmed to fall within an exception.

Self-Dealing Overlap With IRC 4941

Where a taxable expenditure simultaneously benefits a disqualified person within the meaning of IRC 4946, IRC 4941 self-dealing excise taxes may also apply. A common example: a private foundation makes a grant to a for-profit company owned by a substantial contributor (a disqualified person) without expenditure responsibility. The grant is a taxable expenditure under IRC 4945(d)(4) and may also constitute a direct self-dealing act under IRC 4941(d)(1)(E) (transfer of income or assets to a disqualified person). Both taxes are assessed independently, and the foundation and its managers may face simultaneous penalty exposure under both sections. Practitioners must analyze each transaction under each applicable Chapter 42 provision before advising the foundation to proceed.

Form 4720 Filing for Both Taxes

The foundation and any liable foundation managers report IRC 4945 first-tier taxes on Form 4720 (Return of Certain Excise Taxes Under Chapters 41 and 42). The same form is used to report IRC 4940, 4941, 4942, 4943, and 4944 taxes. The foundation must file Form 4720 for the taxable year in which the taxable expenditure was made, and the form is due on the 15th day of the 5th month following the close of that taxable year. Foundation managers who are individually liable for first-tier taxes must each file their own Form 4720. If IRC 4941 taxes are also due, those are reported on the same form, and practitioners must ensure all applicable schedules are completed.

For a related discussion of self-dealing excise taxes and disqualified person definitions, see our guide to IRC 4958 intermediate sanctions. For executive compensation excise tax exposure at tax-exempt organizations, see our IRC 4960 executive compensation excise tax guide.

IRC 4945 Taxable Expenditure Decision Matrix

The table below covers the five main categories and key sub-categories. Use it as a first-pass triage tool; each situation requires full analysis under the applicable regulations.

Frequently Asked Questions

• What is a taxable expenditure under IRC 4945?

  A taxable expenditure under IRC 4945 is any amount paid or incurred by a private foundation for one of five prohibited purposes: (1) influencing legislation (lobbying); (2) influencing elections or carrying on voter registration drives that do not meet the five statutory exceptions under IRC 4945(f); (3) making grants to individuals for travel, study, or similar purposes without prior IRS advance approval under IRC 4945(g); (4) making grants to organizations other than public charities without exercising expenditure responsibility; or (5) making expenditures for any non-exempt purpose. Each taxable expenditure triggers a two-tier excise tax on both the foundation and any knowing manager.

• What are the five categories of taxable expenditures?

  IRC 4945(d) identifies five categories: (1) lobbying -- amounts paid or incurred to carry on propaganda or influence legislation; (2) electioneering and non-qualifying voter registration drives; (3) individual grants for travel, study, or similar purposes without IRS advance approval under IRC 4945(g); (4) grants to non-public charities without expenditure responsibility under IRC 4945(h); and (5) amounts paid or incurred for non-charitable purposes (outside IRC 170(c)(2)(B)). Each category has its own regulatory elaboration and, in some cases, statutory exceptions.

• What is the IRC 4945(g) advance approval process?

  Under IRC 4945(g), a private foundation submits a ruling request to the IRS describing its grant program's purpose, objective and nondiscriminatory selection criteria, supervisory procedures, and recipient reporting requirements. The IRS reviews the submission and, if satisfied that the procedures are sufficiently objective and nondiscriminatory, issues a ruling letter approving the procedures. Grants made in conformity with the approved procedures after the ruling issues are not taxable expenditures. The foundation must disclose the approved program on Form 990-PF. Approval is prospective only -- pre-approval grants or out-of-procedure grants remain taxable expenditures. The foundation should also review the approved procedures before each award cycle to confirm actual practice still matches the approved description.

• What is expenditure responsibility?

  Expenditure responsibility under IRC 4945(h) is the process by which a private foundation exercises control over grants to organizations that are not public charities. It requires: (1) a written pre-grant inquiry into the grantee's management and past use of funds; (2) a written grant agreement specifying the use of funds, requiring repayment of misused amounts, and mandating periodic reports; (3) annual financial reports from the grantee; (4) a final report upon completion; and (5) disclosure on Form 990-PF in the ER section. Expenditure responsibility is required for grants to domestic non-public charities, for-profit entities, and most foreign organizations.

• What is the penalty for making a taxable expenditure?

  IRC 4945(a) imposes a first-tier excise tax of 20% on the private foundation for each taxable expenditure. A knowing manager faces an additional 5% tax on the same amount, capped at $10,000 per expenditure. If the foundation fails to correct the taxable expenditure within the correction period (generally 90 days after the IRS mails a deficiency notice), IRC 4945(b) imposes a second-tier correction tax of 100% on the foundation. A manager who refuses to agree to correction faces a 50% tax capped at $10,000 per expenditure. Both the foundation and liable managers report and pay these taxes on Form 4720.

• Can a private foundation make grants to individuals?

  Yes, but only if the foundation first obtains IRS advance approval of its grant procedures under IRC 4945(g), or if the grant does not constitute travel, study, or a "similar purpose" under IRC 4945(d)(3). Scholarships, fellowships, internship awards, research stipends, and prizes all typically require advance approval. The foundation submits a ruling request to the IRS, receives a ruling letter, and then makes grants in conformity with the approved procedures. Grants made before the ruling is issued, or outside the approved procedures, are taxable expenditures even if the foundation otherwise has approval for a similar program.

• Can a private foundation engage in lobbying?

  No. Any amount a private foundation pays or incurs to carry on propaganda or otherwise influence legislation is a taxable expenditure under IRC 4945(d)(1). Unlike public charities, private foundations have no IRC 501(h) election and no permissible lobbying budget. The prohibition covers both direct lobbying (communicating with legislators) and grassroots lobbying (urging the public to contact legislators), and it extends to grants to other organizations that are earmarked for lobbying. Nonpartisan analysis and study may be permissible under Treas. Reg. 53.4945-2(d)(2) if the materials do not include a "call to action," but practitioners must analyze the content carefully before characterizing an expenditure as nonpartisan analysis.

• How does IRC 4945 interact with IRC 4940?

  Taxable expenditures under IRC 4945 are excluded from the definition of "qualifying distributions" under IRC 4942, which means they do not count toward the minimum distribution requirement or the distribution-based rate reduction under IRC 4940. A foundation that makes taxable expenditures therefore cannot use those amounts to reduce its IRC 4940 net investment income tax burden. If a taxable expenditure also benefits a disqualified person under IRC 4946, IRC 4941 self-dealing excise taxes may apply simultaneously. Both the IRC 4940 and IRC 4945 taxes are reported on Form 4720, and practitioners must analyze each transaction under all applicable Chapter 42 provisions independently.

Related Practitioner Guides

• IRC 4958 intermediate sanctions -- excess benefit transactions, disqualified persons, and Form 4720 excise tax reporting for public charities
• IRC 4960 executive compensation excise tax -- 21% excise tax on excess compensation paid by applicable tax-exempt organizations
• IRC 664 charitable remainder trusts -- CRAT and CRUT structure, payout requirements, and IRC 170 substantiation
• OBBBA IRC 170 charitable deduction -- above-the-line deduction, AGI floor, and non-itemizer rules under the One Big Beautiful Bill Act
• IRC 2055 charitable estate deduction -- charitable bequest planning, qualified organization requirements, and Form 706 reporting
• IRC 4941 self-dealing private foundation -- Six categories, disqualified persons, two-tier excise tax, and correction procedures
• IRC 4942 minimum distribution requirements -- 5% distributable amount, qualifying distributions, set-asides, and undistributed income tax
• IRC 4943 excess business holdings -- permitted holdings percentage, 5-year disposition window, and Form 4720
• IRC 4944 jeopardizing investments -- prudent investor standard, speculative investment prohibition, and Form 4720
• IRC 4946 disqualified persons -- statutory definition of who qualifies as a disqualified person triggering taxable expenditure analysis for individual grants.