Insights · Africa
Equivalency Determination vs Expenditure Responsibility: How US Foundations Fund NGOs Abroad
A US private foundation can fund an NGO outside the US in two main ways. With an equivalency determination, it decides your organization is the equivalent of a US public charity, usually on a tax practitioner’s advice. With expenditure responsibility, it skips that finding but adds controls to each grant: a pre-grant check, a signed agreement, yearly reports from you, and a report to the IRS.
| Equivalency determination | Expenditure responsibility | |
|---|---|---|
| What it is | A good faith finding that your organization is the equivalent of a US public charity | A set of controls the foundation applies to one grant |
| Who does the work | Usually a tax practitioner who reviews your documents and writes advice for the foundation | The foundation’s staff, with your reports |
| What you provide | Governing documents in English, a description of activities, and financial records | Information for a pre-grant check, a signed agreement, and yearly reports |
| Separate bank account or fund | Not needed | Sometimes needed (see below) |
| Reporting to the IRS | No special report for the grant | The foundation reports each grant on its Form 990-PF |
| How long it lasts | Advice can be relied on for up to about two years | Repeated for every grant |
| Works for | Organizations that would qualify as a public charity | Any organization, as long as the grant is for a charitable purpose |
Why do US foundations need either one?
US tax law treats a private foundation’s grant to most organizations other than US public charities as a “taxable expenditure” unless the foundation takes extra steps (26 U.S.C. 4945(d)(4)). A foreign NGO without an IRS ruling falls into that group by default.
The penalties are steep enough that foundations take this seriously. The foundation owes a tax of 20% of the grant. A foundation manager who knowingly approved it owes 5%, up to $10,000 per grant. If the problem isn’t corrected, the foundation’s tax rises to 100% of the grant (26 U.S.C. 4945(a) and (b)).
There are two ways out. The foundation can decide your organization is the equivalent of a US public charity. That’s an equivalency determination, often shortened to ED. Or it can exercise expenditure responsibility, often called ER, on the grant. These rules apply to private foundations. Community foundations and other US public charities follow a different rule, covered further down.
What is an equivalency determination?
An equivalency determination is the foundation’s good faith judgment that a foreign organization would qualify as a US public charity. If it makes that judgment, the grant is treated like a grant to a US charity (26 CFR 53.4945-5(a)(5)).
The safest route is written advice from a “qualified tax practitioner.” That means an attorney, a certified public accountant, or an enrolled agent. The practitioner can even be the foundation’s own employee (Rev. Proc. 2017-53, section 3.03). The advice has to be current, meaning it relies on your financial and other facts from your current or prior tax year.
Two changes in 2015 still confuse people. Before then, the advice had to come from a lawyer, and a signed affidavit from the grantee was often enough. The 2015 rules (T.D. 9740) widened the advisers to CPAs and enrolled agents. They also removed the grantee affidavit as a stand-alone basis. An affidavit can still be part of the file, but it isn’t enough by itself.
The IRS has said written advice isn’t strictly required. A foundation manager who knows US charity law can make the determination. In practice, most foundations rely on a practitioner or a service.
What documents does an NGO need for an equivalency determination?
The IRS guidance for practitioners, Rev. Proc. 2017-53, lists what the advice should cover. Expect to be asked for:
- Your constitution, articles, or bylaws, with an English translation if they’re in another language
- A statement of your charitable purposes
- Proof that, if you close, your assets go to another charity or to the government. This is usually a dissolution clause in your constitution or a provision of your country’s law.
- Proof that no one profits privately from the organization
- Limits on lobbying and a ban on political campaign activity
- A list of affiliated organizations
- A description of your past, current, and planned activities
- Financial information showing where your support comes from, because most public charity categories depend on broad public support
The practitioner also checks whether your organization is on a US terrorism list. An organization on one can’t receive a determination (Rev. Proc. 2017-53, section 5.09).
Read your constitution before anyone asks. If it doesn’t say where assets go when the organization closes, find out whether your national NGO law covers it. If neither does, you may need to amend the constitution, and that can take a board meeting and a filing with your registrar.
How long does an equivalency determination last?
A foundation can rely on written advice for up to about two years after it’s given (Rev. Proc. 2017-53, section 3.03). The limit comes from the rule that the facts must be from your current or prior tax year.
Some foundations use NGOsource, a service launched in 2013 by the Council on Foundations and TechSoup. It keeps a record of each determination so that other member foundations can use it for a fee. Its 2022 guide says a certificate is valid for two years from the date of your most recent financial information, which is typically 1 to 1.5 years in practice (NGOsource). Keeping your financial statements up to date shortens every later review.
What is expenditure responsibility, step by step?
Expenditure responsibility doesn’t decide anything about your organization. Instead, the foundation takes reasonable steps to make sure one grant is spent only for its purpose, gets full reports from you, and reports to the IRS (26 U.S.C. 4945(h)).
The regulation spells out each step (26 CFR 53.4945-5(b) to (d)):
- Pre-grant inquiry. The foundation looks into your identity, history, management, and track record. It should give a reasonable person confidence that you’ll use the grant properly.
- Written agreement. An officer, director, or trustee signs it for your organization. You agree to repay any money not used for the grant’s purpose, to send full reports every year, to keep records the foundation can see, and not to spend the grant on lobbying, election activity, or non-charitable purposes. For a foreign grantee, these terms can be written to fit local law.
- Payment, sometimes into a separate fund. If your organization isn’t a 501(c)(3) or treated as one, you must keep the grant in a separate fund for charitable purposes (26 CFR 53.4945-6(c)(2)). A foundation can treat a foreign group as a 501(c)(3) based on the manager’s reasonable judgment. A separate fund is often a separate bank account or a tracked ledger code.
- Your reports. You report at the end of each of your accounting years until the money is spent, then send a final report. The foundation doesn’t have to audit them unless it has reason to doubt them.
- The foundation’s report to the IRS. For each grant, the foundation reports your name and address, the grant amount and purpose, what you’ve spent, and the dates of your reports. It files this with its Form 990-PF (IRS instructions).
If grant money is diverted to another purpose, the diverted part can become a taxable expenditure for the foundation. That’s why foundations ask for clear budgets and financial reports that match them.
Which one will a foundation choose?
It depends on the foundation and the relationship. An equivalency determination takes more work up front, but then the grant is treated almost like a US grant: no special agreement terms required by tax law, no separate fund, and no special IRS report. That makes sense when a foundation expects to give to you more than once.
Expenditure responsibility needs no finding about your organization, so it works for groups that don’t meet public charity tests, such as a new organization without a track record of public support. The trade-off is ongoing paperwork for every grant. Some small foundations prefer to give through a US charity instead, which brings us to the third route.
What about giving through a US charity or “friends of” group?
US public charities, including community foundations and “friends of” organizations, aren’t covered by the private foundation rules above. They have their own rule: the US charity must approve the program as part of its own purposes and keep control over how the money is used. If a donor just earmarks a gift to pass through to a foreign group, the donor can’t deduct it (IRS Publication 526).
US public charities also report foreign grants on Schedule F of Form 990. They list grants of more than $5,000 to any one foreign organization and describe how they monitor how the money is used (Schedule F instructions). So even a US partner or fiscal sponsor will ask you for budgets, reports, and receipts. Our Africa page explains how we set up these partnerships.
How can an NGO get ready before a foundation asks?
You can prepare most of this once and reuse it with every US funder:
- English versions of your registration certificate, constitution, and bylaws
- A dissolution clause, or a note on the national law that covers it
- Your latest audited or reviewed financial statements and a list of your main funding sources
- A board list and a short history of the organization
- An annual report or a summary of activities for the past two or three years
- A way to track each grant separately in your accounts
US charities and foundations also check grantees against the Treasury Department’s sanctions lists, using the OFAC sanctions search. Treasury publishes voluntary guidance for charities on this. You don’t need to do anything, but expect the check.
Before you approach anyone, find the right funders. Private foundations list the grants they pay on Form 990-PF, so you can see which ones already give in your country. Our guide on how to find grants shows how.
Frequently asked questions
What is an equivalency determination?
It’s a US private foundation’s good faith finding that a foreign organization is the equivalent of a US public charity. The foundation usually bases it on written advice from an attorney, CPA, or enrolled agent. The grant is then treated like a grant to a US charity.
What is expenditure responsibility?
It’s a set of steps a US private foundation follows for one grant: a pre-grant inquiry, a signed agreement, yearly reports from the grantee until the money is spent, and a report to the IRS on the foundation’s Form 990-PF.
Does a foreign NGO pay for an equivalency determination?
The foundation arranges it. NGOsource, a common service, charges the foundations that are its members, and its guide doesn’t describe a fee for the NGO. Your main cost is the time to gather and translate documents.
How long is an equivalency determination valid?
Up to about two years, because the advice has to rest on the grantee’s current or prior year facts. NGOsource says its certificates typically last 1 to 1.5 years in practice.
Can a US public charity give to a foreign NGO without either step?
Yes. The private foundation rules don’t apply to public charities. But the US charity must keep control over how the money is used, and it reports foreign grants over $5,000 per organization on Schedule F.
References: 26 U.S.C. 4945; 26 CFR 53.4945-5; 26 CFR 53.4945-6; T.D. 9740 (2015); Rev. Proc. 2017-53; Form 990-PF instructions; IRS Publication 526; Schedule F instructions. Sources checked October 26, 2026.
This article is general information. It is not legal, tax, accounting, or financial advice, and reading it does not make you our client. Laws, regulations, and funder policies change, so check the cited sources and your own award terms before you act. Aventis West is not a law firm or an accounting firm. For advice on your own situation, talk to a qualified attorney or CPA. See our terms of use.
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