Q&A #81 – Must a Form 1099 be issued for a need-based grant made to an individual?
Question: My 501(c)(3) organization provides cash grants to financially distressed families as part of a broader family support program including individualized coaching on life and financial skills and group support sessions. As part of the program, the families are required to complete some journaling and recordkeeping to show that they are making progress in the program. Are these grant amounts taxable to the recipients, and must a Form 1099 be provided?
Answer: In general, amounts granted to an individual solely out of the payor’s “detached and disinterested generosity” are treated as “gifts” that are excluded from tax under section 102 of the Internal Revenue Code. The IRS has confirmed that a payment made by a charity to an individual that responds to the individual's needs (in order words, is motivated by charitable intent rather than any moral or legal duty) qualifies for this exclusion, and consequently is not subject to Form 1099 reporting. See Revenue Ruling 2003-12.
As further explained by the IRS in Publication 3833, some grants to individuals will not meet the requirement of being motivated by charitable intent, such as where the charity receives services or some other economic benefit in return for the payment. Following a similar principle, gifts to employees are generally not excluded from tax (although there are other exclusions that could potentially apply to payments to employees, such as “qualified disaster relief payments” under section 139 of the Internal Revenue Code). Also, certain payments such as scholarships, fellowships, prizes, and awards are subject to special rules, so this general guidance should be understood in the context of assistance provided to meet the basic financial or medical needs of the recipient.
Assuming that these grants are not paid to employees, volunteers, or service providers of the organization (or their family members), the program described in your question certainly appears to be motivated by a charitable intent to provide for the needs of recipients who are experiencing financial distress. The fact that some recordkeeping is required to demonstrate that the recipients are making progress in the program should not, by itself, suggest that your organization is receiving services or other economic benefits in exchange for the grant. You would have a strong argument that these requirements are put in place for the benefit of the recipients, to enhance the impact of the program in their lives.
Planning Tip – Recordkeeping is particularly important when providing financial assistance to individuals, often referred to as “benevolence programs.” As explained by the IRS in Revenue Ruling 56-304, charitable organizations engaging in these activities are expected to maintain adequate records and case histories. These records should, at a minimum, include the name and address of each recipient, the amount and date of each distribution, the purpose for which the assistance was given, the manner in which the recipient was selected, and the relationship, if any, between the recipient and the “disqualified persons” of the organization.
Thus, it is likely that the cash grants paid by your organization to financially distressed families qualify as non-taxable gifts under Section 102 and therefore should not be reported on Form 1099.
For information on whether a Form 1099 must be issued for a grant made to a nonprofit organization, check out Q&A #96.
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