Can a Private Foundation Share Office Space, Employees, and Other Resources With a Related Business?
Private foundations are often closely connected to a family business or sponsoring company. Subject to specific private foundation self-dealing rules, the foundation may operate from the same building, use some of the same equipment, or rely on employees who also work for the business.
These arrangements can be convenient, but they need to be structured carefully to comply with these rules.
The important point is that self-dealing rules are stricter than ordinary business rules. A transaction can be prohibited even if the foundation pays a fair price or receives a good deal.
For purposes of this article, a “related business” generally means a business that is considered a disqualified person with respect to the foundation, such as a sponsoring company or a business substantially owned or controlled by the foundation’s donors, managers, or certain family members.
Can the Business Give the Foundation Free Office Space?
Generally, yes.
A related business can generally allow the foundation to use office space, equipment, or similar facilities without charge, provided they are used exclusively for the foundation's charitable purposes.
For example, a family business might allow its family foundation to use an available office, conference room, printer, or computer equipment without charging the foundation.
The result can be very different if the foundation pays the related business.
Suppose the business normally rents an office for $1,000 per month but charges the foundation only $500. Even though the foundation is receiving a favorable price, the payment of rent to a disqualified person will generally constitute self-dealing.
This produces an important practical rule:
Free use provided by the related business to the foundation is generally permissible. Paying the related business for that same use may not be.
What About Utilities, Supplies, and Other Shared Costs?
Foundations should be cautious about simply reimbursing a related business for a percentage of its overhead.
For example, a company might calculate that the foundation uses 10% of its office space and then invoice the foundation for 10% of the utilities, supplies, internet service, and other costs. Although this may seem reasonable from an accounting perspective, payments from the foundation to a disqualified person can create self-dealing concerns.
When possible, a cleaner arrangement is for the foundation to pay an unrelated third-party vendor directly for expenses properly attributable to the foundation.
Separate billing and good documentation are helpful. Foundations should avoid informal allocations of business expenses whenever the payment ultimately flows back to a related company.
Can Employees Work for Both Organizations?
Yes, but employee-sharing arrangements require more care than simply sharing an office or a printer.
There are several ways these arrangements may be structured, and the tax treatment can depend significantly on who employs the individual, who pays the individual, what services are being performed, and whether money flows between the foundation and the related business.
When the business provides employee help for free
One of the simpler arrangements is for the related business to allow one of its employees to perform some work for the foundation without charging the foundation.
For example, an employee of the family business might occasionally help organize foundation records, assist with grant administration, or provide other administrative support. If the business continues to pay the employee and does not seek reimbursement from the foundation, this type of arrangement can generally be easier to accommodate under the self-dealing rules.
Even when no reimbursement is involved, it is a good idea to document the arrangement if the employee is providing significant or recurring services to the foundation.
When an employee works for both organizations
It may also be possible for the same individual to work directly for both the business and the foundation, with each organization paying the employee for the work performed on its behalf.
In that situation, it becomes important to clearly separate the employee's responsibilities between the two organizations.
For example, the foundation should generally be able to show:
• What work the employee performs for the foundation
• Approximately how much time is spent on foundation activities
• That the foundation's compensation relates to work actually performed for the foundation
• That payroll, benefits, and other employment costs are being handled appropriately
When the employee regularly works for both organizations, actual time records are preferable to a rough annual estimate. A record showing that an employee spent six hours this week on foundation work is generally more supportable than simply deciding at year-end that 20% of the employee's salary should be assigned to the foundation.
The IRS has previously considered employee-sharing arrangements in which employees maintained detailed time records and the organizations separately accounted for compensation and benefits. Although those rulings are based on specific facts and are not general safe harbors, they illustrate the importance of keeping the two organizations' responsibilities clearly separated.
When the business pays the employee and invoices the foundation
More caution is warranted when the employee works for the related business, the business pays the salary and benefits, and then the business sends the foundation an invoice for a portion of those costs.
From an accounting standpoint, this may look like a straightforward reimbursement. For example, the company may determine that an employee spent 15% of the month working on foundation matters and invoice the foundation for 15% of the employee's compensation.
The self-dealing rules, however, do not necessarily treat this as ordinary cost sharing. The foundation is making a payment to a disqualified person—the related business. That payment may therefore constitute self-dealing unless a specific exception applies.
There is an exception that permits reasonable payments to disqualified persons for certain personal services that are reasonable and necessary to the foundation's activities. This generally focuses on professional or managerial services. The exception is narrower than many foundation leaders expect and should not simply be assumed to cover routine clerical, maintenance, custodial, or other operational work.
For that reason, a foundation should be particularly careful before reimbursing a related business for employee costs. Where practical, having the foundation employ and pay an individual directly for foundation work can sometimes create a clearer separation than having the related company allocate payroll costs back to the foundation.
Can the Related Business Use Foundation Resources?
This is generally more problematic.
The self-dealing rules are intended in part to prevent foundation assets from being used for the benefit of disqualified persons.
For example, major concerns would arise if:
• Foundation employees perform work for the related company.
• The company regularly uses equipment purchased by the foundation.
• Foundation funds are used to improve property owned by the related company.
• The foundation pays for an event while the related company receives a significant advertising or promotional benefit.
An incidental benefit to the business does not automatically create self-dealing. A company's name may naturally receive some recognition because of its connection with the foundation. The concern becomes greater when the foundation provides the business with a tangible economic or commercial benefit.
Why Isn't Paying a Fair Price Enough?
This is one of the most important aspects of the self-dealing rules.
In many areas of tax law, a fair-market-value transaction between related parties is acceptable. Private foundation self-dealing rules often work differently.
If a transaction is prohibited, charging a fair price generally does not fix the problem.
That is why foundation leadership should evaluate the structure of a related-party arrangement before money changes hands, rather than simply asking whether the amount being charged is reasonable.
Practical Guidance for Foundation Leadership
When a private foundation shares resources with a family business, sponsoring company, or other related entity, keeping the arrangement simple is usually best.
The related business may often provide office space, equipment, or administrative support to the foundation without charge. When the foundation has expenses of its own, paying unrelated vendors directly is generally preferable to reimbursing the related business.
For shared employees, the foundation should clearly identify what work is being performed for each organization and maintain reasonable records supporting the allocation of time and compensation. Arrangements in which the related business invoices the foundation for employee costs deserve particular review.
Most importantly, do not assume that a small payment, reimbursement at cost, or favorable price is automatically permissible. The private foundation self-dealing rules can apply even when everyone involved believes the arrangement is fair.
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