How to Establish Scholarship under IRS Rules
Not only is establishing a scholarship a good deed, it's also a way to write off income as if done correctly. Most scholarships are created by companies or other entities through creation of a private foundation. A foundation can award funds to employees, their relatives, or to any individual so long as the recipients are not selected by any discriminatory means.
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Instructions
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Set up a 501(c)(3) foundation. A nonprofit organization starts out like any company or corporate entity, with a charter, by-laws and directors. It must apply for 501(c)(3) status through the IRS, with Form 1023 (see Additional Resources below). Assuming your scholarship is funded primarily from a single source, and its objective is to make grants to other charitable organizations or individuals, it will be treated as a private foundation by the IRS.
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Donate to the foundation. A corporation can give up to 10 percent of its taxable income in deductible donations to qualifying charities. Your newly formed 501(c)(3) scholarship foundation is just such an entity. An individual donor can give as much as 30 percent of his adjusted gross income to private foundations. Thus, donations to the scholarship fund are tax deductible for the donor up to these limits.
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Set up a selection committee. With the scholarship foundation funded, it should work to set up a selection committee to be responsible for awarding grants. Because the IRS prohibits discrimination and self-dealing through private foundations, having award decisions made by individuals separate from the foundation, its organizers, and financial backers protects all involved.
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Award grants. In order to maintain its tax-exempt status, the foundation must primarily be engaged in the public interest for which it was organized. A private foundation can award grants to individuals from the public at large, or only to employees and their relatives. When awarding to employees, other factors besides employment must be considered, and all awards must be objective and non-discriminatory.
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Tips & Warnings
If awarding to the public at large, the method of selection must be approved in advance by the IRS. A private foundation can also be used to offer educational loans to children of employees, but for these purposes the foundation must meet all the requirements of grants to individuals from the public plus additional tests for employer-related loan programs.
