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3 Key Considerations for Charities and Foundations Offering Scholarships

Scholarships are an excellent opportunity to make a positive impact and support the objectives and mission of your nonprofit. However, there can be IRS compliance issues for your organization if your program isn’t set up properly.

Keep these 3 considerations in mind when creating a scholarship program:

1.  Establish the scholarship’s purpose in alignment with your organization’s goals. Starting with a clear alignment of purpose helps avoid eligibility and selection issues. For example, an animal rescue charity may wish to offer scholarships to students studying veterinary medicine; a food security foundation may wish to offer scholarships to students pursuing studies in nutrition.

2.  Define eligibility rules in compliance with IRS requirements. To start, eligibility criteria must be broad enough to serve a public interest. But, you can limit the eligible group to the people you wish to serve with your scholarship, such as residents of a city or state. To show that your program doesn’t create unfair advantages, you should also include a plan to publicize your scholarship to reach those who are eligible. Rules about defining scholarship eligibility vary depending on the type of organization awarding the funds. It’s essential to understand and comply with all regulations.

3.  Specify an objective selection process that follows specific guidelines. Recipient selection has a lot of potential for problems and will come under scrutiny. It’s imperative that you take measures to ensure that members of your organization cannot privately benefit from the selection process. Selection criteria need to be objective and non-discriminatory; however, you don’t have to limit the criteria to grades and test scores. You can and should define criteria that align with your purpose and mission, making sure that all criteria are compliant. Different regulations exist for public charities, for private foundations, and for funding scholarships connected to educational institutions and businesses. Non-compliance can result in financial and other penalties.

Scholarship programs look simple on the surface, but compliance is complicated. Foundation Group has over twenty years of experience helping foundations and charities ensure compliant scholarship programs that serve their intended purpose.

Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has 4 Comments

  1. I have tried to ask the question in another blog but couldn’t. So here goes. We run a nonprofit organization for adults with Developmental Disabilities, and Most of our board members are family of the director or or old co-workers of his. He values no ones opinion of our employees or our executive directors opinions. He will not spend and of the money in the bank and it’s 6-figures, to buy nothing. No van, no up keep on the homes, no salary raises, nothing and he has all the board members in his hand because they are his family and or BFF’s. What should we do? We are in Georgia.

    1. This sounds like a tough and unfortunate situation. Assuming the organization is a public charity, it is required to have a majority of the board to be unrelated through blood, marriage, or business dealings. If you can’t convince them to make changes, in our experience, the best thing for you to do is likely to walk away from the situation.

      1. I, too, am closely tied to a nonprofit with a nepotistic board: a husband/wife, and a former staff member/her daughter. The community wants to do something to save this organization, but they will not listen to reason, and altered their bylaws to allow for such a small board. Can they change bylaws while in violation of them? What can be done short of calling the press or getting a watchdog organization to file suit?

        1. Sorry for the late response. To your question, as long as changes to the bylaws are made in accordance with the amendment procedures laid out in the bylaws, they can change them. While violation of other provisions is a serious matter, it doesn’t prevent them from acting lawfully in other ways. As for remedies, getting the press involved might put needed pressure on them, there’s no guarantee. And, lawsuits can only be filed by those with standing. This gets tricky with public charities. Some argue that as a charitable organization, the community at large (which might include a watchdog group) has standing, but case law is much less clear. Many, if not most, courts will argue that unless the plaintiff is directly impacted, they have no standing to litigate. It sounds like a mess. I hope it all turns out well.

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